Joel Greenblatt: Investment Strategy, Valuing Stocks And Portfolio Management

A presentation and Q&A with value investor and author, Joel Greenblatt. In this presentation, Joel discusses how the stock market works and his principles for stock valuation. Joel also talks about investment strategies, active management and compounded interest.

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Joel Greenblatt: Investment Strategy, Valuing Stocks and Portfolio Management


It doubled from 2007 to 2009 had halved and from 2009 to today it’s roughly tripled which is my way of telling them that people are still crazy. That was just the last 17 years and a way understating the case because the S&P 500 is an average of 500 stocks if you lift up the covers and look underneath what’s going on this huge dispersion of those 500 stocks between those at any particular time that are in favor and those that are out of favor. And so there’s a wild ride going under neath the covers if you look under the covers the wild ride of those 500 stocks at any particular time in that doubling and having doubling and having with the average of 500 stocks are really smoothing the ride. So there should be an opportunity. And if you understand what stocks are and I guarantee my students first day class I make a guarantee every year they walk in and I guarantee them this if they do good valuation work at a company I guarantee them the market will agree with them. I just never tell them when could be a couple of weeks could be two or three years. But if they do good valuation work the market will agree with them. Stocks are not pieces of paper that bounce up and down and you put complicated ratios on like sharp ratios of Certina ratios stocks or ownership shares of businesses that you are valuing and if so inclined tried to buy at a discount.

So if you believe what Ben Graham said that this horizontal line is fair value and this wavy line around that horizontal line our stock prices and you have a disciplined process to buy perhaps more than your fair share when they’re below the line. And if so inclined sell or short more than your fair share when they’re above the line the market is throwing us pitches all of the time. The reason people don’t outperform the market there are behavioral problem their agency problems but it’s not because we’re not getting those opportunities. I will show you briefly let me tell you how we value stocks. It’s not very tough and I think most of you will under stand it. And I think the best example that resonates seems to resonate with most people is thinking about buying a house and to keep the numbers simple let’s say that someone is asking a million dollars for the House they want to sell. And your job is to figure out whether that’s a good deal or not. So there are certain questions you would ask first. One of the first questions I’d ask is Well how much rent can I get for that thing. OK. So in other words if I rented out that million dollar house how much rent would I collect if I were going to collect 70 80 90 thousand dollars a year seven eight nine percent yield on that house. That’s one way I might go about valuing it and what’s the next question you would ask. I’m pretty sure I know what it would be. What are the other houses on the block going for on the block next door in the town next door. How does this compare how relatively cheap is this.