Joel Greenblatt was a speaker at the 2018 Prime Quadrant Conference in Toronto. The Prime Quadrant Conference is an annual conference for family offices and ultra-high-net-worth investors.
Joel Greenblatt Speaking At The 2018 Prime Quadrant Conference
Q1 hedge fund letters, conference, scoops etc
Transcript
Thank you very much. I'm just going to give a few opening comments because the title was value investing in the current environment and I think I was thinking about a better title. And it probably would have been as value investing dead. Or is it just sleeping. And. Right now we actually. And by the way the answer to that you would expect me as a value investor to say no it's not dead. But I'm probably going to say Oh maybe yes it could be. I don't know. Would be another answer you might hear from me in a few minutes. And the last one would be. I don't really care. OK so I think I covered everything.
So where do we. Let me tell you where we stand today and tell you what's going on in the market. We value companies bottoms up. So if we think about the S&P 500 in the United States we value every name in the S&P 500 bottoms up back to when we have good data in 1990. And we can contextualize where do we stand today or at least as of yesterday did pretty well today. But where we were as of yesterday relative to those 28 years and we were in the 19th percentile last night versus the last 28 years all that means according to our measures of valuation of individual stocks the market's been cheaper 81 percent of the time since 1990 and been cheaper 19 percent of the time. We can go back in time and look and see what's happened over the next it's not a projection it just says what's happened from this valuation level in the past over the next year or two and what's happened in the past from the 19th percentile is your forward returns of average about 46 percent to year forward ten to twelve. Now during that whole period those 28 year period the market average about 10 percent returns.
So you're probably familiar with. And so we're expecting subnormal returns but not negative returns even though we're expensive not. Not negative returns. The Russell 2000 which is stock number one thousand one through 3000 United States that's a little different story at the end of September was in the second percentile and cheaper 98 percent of the time now with the market falling it's in the 6 percent top and cheaper 94 percent of the time since 1990. And what it's been here in the past year for returns have been about flat. OK. So so pretty expensive. It's since we're talking about value investing right now. If you look at the way traditionally Russell or Morningstar classify value names from 1980 to 2006 value outperform the market by about 2 percent since then 2007 to today growth stocks have outperformed the market by about 5 percent a year. So quite a big turnaround. Long time since value's been good actually through September of this year in the United States there is a index called Russell pure growth and Russell pure value which is just the growth stocks just the value stocks in the Russell 1000 index and the Russell pure growth was up over 28 percent year to date through September 30. The Russell pure value was up 1 percent huge dichotomy 27 percent that's come back to earth a little bit in the last month.
But it's still a 15 percent spread growth's outperforming value which kind of has the same story we've seen for the last dozen years or so. So it's you know as value investing. Now Russell and Morningstar and other places define value as stocks selling at low price to book values low price to sales values. And. If we're were talking about that the answer is is value going to come back in and I don't really know there's been a whole move towards factor investing where people take factors within companies or stocks and you know it's very clear like a factor like momentum's worked for the last 30 40 years not just the United States but across the globe with maybe one or two exceptions worked very well. And I have no argument that it has worked well for the last 30 40 years but if it didn't work for the next year or two. It could be that it's just out of favor for a few years and all we have to do is be patient it works over the long term or it could be that momentum investing. You know there are plenty of ability to crunch numbers and data and computers and smart people and research papers and it could be that too many people are doing momentum investing in the trade has become crowded and it's degraded. If it didn't work for the next two years I wouldn't know the answer to that question is it. Should I just be patient. It works over the long periods of time and it's just cyclically out of favor or has that trade become crowded and degraded. And I feel the same way with low price book and low price sales investing. If a company is selling close to its book value that means it's selling close to the historic cost of its assets. That means that the market is not giving much of a premium.
