20 Timeless Investing Lessons From Joel Greenblatt

One of our favorite investors here at The Acquirer’s Multiple is Joel Greenblatt. Greenblatt is the Managing Partner of Gotham Capital, a hedge fund that he founded in 1985, and a Managing Principal of Gotham Asset Management. He is also the author of four books, You Can Be A Stock Market Genius, The Little Book That Beats The Market, The Big Secret For The Small Investor, and The Little Book That Still Beats The Market. Over the years Greenblatt has provided investors with many value investing insights. Here’s a collection of some of the best:

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  1. The great thing is, there’s always something happening. Dozens of corporate events each week, too many for any one person to follow. But that’s the point: you can’t follow all of them, and you don’t have to. Even finding one good opportunity a month is far more than you should need or want.
  2. On Wall Street, there ain’t no tooth fairy!
  3. Stock prices move around wildly over very short periods of time. This does not mean that the values of the underlying companies have changed very much during that same period.
  4. The strategy of putting all your eggs in one basket and watching that basket is less risky than you might think. If you assume, based on past history, that the average annual return from investing in the stock market is approximately 10 percent, statistics say the chance of any year’s return falling between -8 percent and +28 percent are about two out of three. In statistical talk, the standard deviation around the market average of 10 percent in any one year is approximately 18 percent. Obviously, there is still a one-out-of-three chance of falling outside this incredibly wide thirty-six-point range (-8 percent to +28 percent).
  5. Most people have no business investing in individual stocks on their own!
  6. Investing is a fun game and you want to find the people who are just smitten with it. I wouldn’t say for the best ones that it’s about the money – it may fall off the back of the truck, but it’s not at all why they play the game.
  7. There’s a virtuous cycle in people having to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can’t be a good value investor without being an independent thinker- you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do. The back and forth that goes on in the investment process helps you get at that.
  8. A lot of smart people can do the spreadsheets and analysis. What sets people apart to us is a combination of passion, creativity and an ability to put ideas into context. Value investors know things go in and out of favor – the best ones know when that’s happening and how to take advantage of it.
  9. Generally, if I am good and I get 4 out of 6 right or how many I get.  I look out three years. I take my best shot; I look for a wide disparity.  I always looking for a catalyst or the market will realize what I see.   What will make people see what I see? Eventually, in three years or more you don’t even need a catalyst.  There are a lot of things that can happen.  The efficient market people are right but only long term.  But eventually the facts come out.  Whatever people were uncertain about now over the next two or three years, they find the answer to. There are a lot of people out there trying to figure out what something is worth.
  10. Paying a bargain price when you purchase a share in a business is a good thing. One way to do this is to purchase a business that earns more relative to the price you are paying rather than less. In other words, a higher earnings yield is better than a lower one.
  11. Though not easy to do, even maintaining a three- to five-year horizon for your stock market investments should give you a large advantage over most investors. It is also the minimum time frame for any meaningful comparison of the risks and results of alternative investment strategies.
  12. Somehow, when ownership interests are divided into shares that bounce around with Mr. Market’s moods, individuals and professionals start to think about and measure risk in strange ways. When short term thinking and overly complicated statistics get involved, owning many companies that you know very little about starts to sound safer than owning stakes in five to eight companies that have good businesses, predictable futures, and bargain prices. In short, for the few who have the ability, knowledge, and time to predict normal earnings and evaluate individual stocks, owning less can actually be more—more profits, more safety . . and more fun.
  13. Although over the short term Mr. Market may price stocks based on emotion, over the long term Mr. Market prices stocks based on their value.
  14. It turns out that if you just stick to buying good companies (ones that have a high return on capital) and to buying those companies only at bargain prices (at prices that give you a high earnings yield), you can end up systematically buying many of the good companies that crazy Mr. Market has decided to literally give away.
  15. Perhaps, since the measurement of potential gain and loss from a particular stock is so subjective, it is easier, if you are a professional or academic, to use a concept like volatility as a substitute or a replacement for risk than to use some other measure. Whatever the reason for everyone else’s general abdication of common sense, your job remains to quantify, by some measure, a stock’s upside and downside. This is such an imprecise and difficult task, though, that a proxy of your own may well be in order.
  16. Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.
  17. Buying a share of a good business is better than buying a share of a bad business. One way to do this is to purchase a business that can invest its own money at high rates of return rather than purchasing a business that can only invest at lower ones. In other words, businesses that earn a high return on capital are better than businesses that earn a low return on capital.
  18. So one way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety. The upside, while still difficult to quantify, will usually take care of itself. In other words, look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.
  19. Most investors won’t (or can’t) stick with a strategy that hasn’t worked for several years in a row.
  20. Traditional value investing strategies have worked for years, and everyone’s known about them. They continue to work because it’s hard for people to do, for two main reasons. First, the companies that show up on the screens can be scary and not doing so well, so people find them difficult to buy. Second, there can be one-, two- or three-year periods when a strategy like this doesn’t work. Most people aren’t capable of sticking it out through that.

Article by Johnny Hopkins, The Acquirer's Multiple

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”