Joel Greenblatt Reveals The SECRET To Investing Success by Lars Christian Haugen
Do you know who Joel Greenblatt is?
If you don’t follow the investing industry, there’s a big chance you don’t know who he is. But if you want to become a better investor, he’s definitely someone you need to learn about.
Joel Greenblatt has been a fund manager for more than three decades, and his performance has been one of the best in the industry. He is also a professor at Columbia University, which is where Ben Graham, the father of value investing, taught Warren Buffett back in the day.
Ask any serious investor and they will know who Greenblatt is.
Just to show you why he is so famous, let’s take a look at his performance. In the first decade of managing his fund (1985-1995), he achieved an average annual return of 50% (before fees), and for the whole period when he managed the fund (1985-2006) his performance averaged 40% per year (he closed the fund to outside investors in 2006).
As a comparison, Warren Buffett has averaged about 20% per year in his career (however, this is a bit of an unfair comparison for Buffett because he manages more money and has had a longer career).
Greenblatt was so successful that he turned investors away because he didn’t need their money. Must be a nice situation to be in.
I found an estimate online that his net worth is $500 million, but there’s no way of knowing the accuracy of this number. However, needless to say he is extremely rich. And he could have been much richer if he had kept growing his fund.
But the point I am trying to make is that Joel Greenblatt's achievements are absolutely EXTRAORDINARY. And that word really deserves to be capitalized. Greenblatt is one of the best investors of our time, if not ever.
He is truly one of my heroes. I know it’s a bit weird to have an investor as your hero, but his achievements are just too impressive, and he is also very generous. I have tremendous respect for him.
And at one point I actually want to befriend him (I’m coming for you Greenblatt!).
Keep it simple
But I don’t just admire Joel Greenblatt for his success. I also admire him for sharing his knowledge and teaching others how to invest like him.
As I mentioned, he teaches at Columbia University and he has also written several books.
What I really love about his teachings is his ability to keep things simple. Considering that he is one of the most successful fund managers of our time and a professor at one of the best universities in the world, he is undoubtedly a smart dude.
But the source of his success is not his intelligence. He has attributed his success to his ability to keep things simple.
To paraphrase Joel Greenblatt:
“There are smarter and better analysts than me, but what sets me apart is my ability to think simply and a little differently. It’s about the context in which you put the analysis”
Joel Greenblatt's Secret
So at this point you are probably asking yourself what the secret to investing success is.
And you might think that I am talking rubbish, saying that there is a “secret” (if there really was a secret, wouldn’t everybody have learned it by now?). However, Joel Greenblatt actually wrote a book called “The Big Secret For The Small Investor”, so the secret is real and it’s taken directly from Joel Greenblatt.
And given his background, I think we should listen.
And I guarantee you that it’s simpler than you think. In fact, you might get disappointed when I tell you.
But before we get to that, I have to share with you a study that Joel Greenblatt referred to in his book. The study looked at fund managers over a ten year period, and they discovered something interesting about the top performers.
Of the top quartile (the best performing 25 percent), 96 percent of them (so basically everyone) spent at least one three-year period in the bottom half of the rankings.
Moreover, 79 percent of them spent at least three years in the bottom quartile (bottom 25 percent of managers).
But the statistic that shocked me was that 47 percent of the top performers (so basically half), spent at least three years in the bottom 10 percent.
That is very significant when you think of it. Among the top quartile of performers, HALF of them had to spend THREE years in the BOTTOM 10 percent. Just imagine how difficult that is, especially if you are a professional money manager.
I want you to really think about that. Imagine if you invested with a fund manager, and then after three years he was in the bottom 10 percent of performers (!!). Would you still let him manage your money?
And then he tells you “just hang in there a little longer, it will turn around”. What would your reaction be? Honestly?
And let’s face it, chances are that the fund manager would have been fired long before he got to three years.
“SO WHAT IS THE SECRET THEN??”
I’m sure you’re asking yourself that question by this point. So fine, I’ll tell you. The secret is simply:
PATIENCE.
That is the conclusion from Joel Greenblatt's book. You simply have to be patient and ride out the bad times.
Are you a bit disappointed? I’ve built up to this huge secret, and then you find out you simply have to have patience. You were probably hoping for some magic bullet that you could implement in your portfolio today that could help you achieve extraordinary results.
If that’s the case, I’m sorry to disappoint. But let’s get one thing straight. This is GOOD NEWS.
Just think about it.
This means that you don’t have to do anything extraordinary, you just have to wait.
This is what Charlie Munger, billionaire investor and Warren Buffett’s partner, refers to as “sit on your ass investing”.
You can achieve more by doing less. That sounds pretty good to me.
And it’s very motivating. Because no matter who you are, you have the ability to practice patience. I have found that a common reaction for me when an investment goes down is to start looking for other investments. I get stressed because I feel I need to correct it.
But when I remind myself that the secret is simply to wait, it calms me down and it let’s me put things into perspective.
But the BAD NEWS is that having patience sounds much easier than it actually is. If you had to endure three years of underperformance (as the top fund managers did) I can almost guarantee you that your internal dialogue will not be “I know I’m right, so let’s just wait a bit longer”. It’s more likely to be “you are an IDIOT, and you are WRONG. You have lost money and you have no idea what you are doing”.
But patience can be practiced. And now that you know that one of the most successful investors of our time says it’s the secret to investing success, I’m sure you have the motivation to become more patient.
So the key takeaway for you is that when you make an investment and it goes against you, just wait. Don’t stress, don’t start looking for other investments, don’t fret. Just know that patience is the secret, and when most people are abandoning the ship, you are holding steady. And you know that that’s what will set you apart in the long term.
P.S. the strategy of having patience assumes that our analysis is correct. If you invest in crap companies and just sit on them, you are doing it wrong.
P.P.S. I recently wrote a FREE GUIDE called "3 Simple Must Read Books - That Are Guaranteed To Make You A Better Investor". Click the link to get the guide.
The Big Secret for the Small Investor: A New Route to Long-Term Investment Success by Joel Greenblatt
