Joel Greenblatt: Valuing Businesses, Decline Of Active Management

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A interview and Q&A with value investor and author, Joel Greenblatt. In this interview, Joel discusses how he values a business and the value investment strategy. Joel also talks about the decline in money being managed by active managers and how he weights and sizes stocks in his portfolio.

Joel Greenblatt: Valuing Businesses, Decline Of Active Management and Portfolio Structure (2018)

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So I really sent this title in to my head of sales as a joke. But he took me seriously because he knows I'm a jet fan. A Mets fan. I'm a Knicks fan. And even Warren Buffett says that most people should just index and I'm a value investor. So I guess the question could read should I kill myself. And I I really at least in the next few years don't have a lot of hope for my sports teams. But whether value investing is dead or not is another question. And the answer. That you expect me to say is No and I'm going to say that I'm also going to say it might be I'm also going to say I don't know and I'm finally going to say I don't care. So I think I cover everything there. Before I get there.

Let's talk about the S&P 500. So the market fell. Yesterday and we value businesses and I'll explain briefly how we go about valuing businesses but we value all the stocks in the S&P 500 and we've done that every day since we have good data going back to 1990 weighting it according to the S&P 500. And what that lets us do is contextualize where do we stand today on a valuation basis versus the last 28 years. And the answer to that question of course is the way we value companies. And I'll go through that briefly is we're in the 25th percentile after yesterday towards expensive meaning the market's been cheaper 75 percent of the time over the last 28 years and it's been cheaper 25 percent of the time the Russell 2000 a little different story that's in the seventh percentile has been cheaper 93 percent of the time over the last 28 years and when it's been here in the past year Ford returns have averaged about flat for the S&P which is in the 25th percentile average returns from its predictions just saying what's happened from this valuation level in the past year for returns of average five to seven percent and. Two year forward turns 12 to 14. So that's where we are. So subnormal for the S&P subnormal returns but not negative the market average 9 to 10 percent returns during that period.

So still positive returns and we don't have to get back to those 9 or 10 percent expected returns. But a few ways we could get back to that is if the market would fall 17 or 18 percent tomorrow then going forward expect returns would get closer to 9 or 10 percent. But that doesn't have to happen the market could just under earn. Some normal returns 4 to 5 percent in each of the next three years and three years from now if we had a normal trajectory of earnings we would also get pretty close back to that 9 or 10 percent expected return. So I don't know if you call that valueless but it gives you context. While it's valueless as to what's going to happen tomorrow or next month. But I think to give you context to where markets are right now it is helpful to us as far as value is concerned. Corty Russell data value investing did quite well for a long period of time 1982 to 2006 it outperformed the market by about 2 percent a year. Since then the last 12 years growth has outperformed the market by about 5 percent a year.

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