One of the blogs I read often (CSInvesting.org) recently did a blog post that contained links to some of his notes from a value investing class audited at Columbia. He doesn’t list who the investor is in his notes, as he says he wants his readers to be unbiased as they read through the notes. As I read through the first link that he calls Class Notes-Introduction to Value Investing for Special Situations, it’s clear that the class is being taught by Joel Greenblatt.
I’ve studied Greenblatt in detail and have come across similar notes and even some videos on the classes he teaches at Columbia, where he is an adjunct professor. You can read my resource page on Greenblatt for more info/links/videos. He is famous for making 40% returns from 1985-2005, and 50.0% gross returns (from 1985-1994) while managing outside funds at his hedge fund Gotham Capital. Those are annual returns… over 20 years I don’t know any other investor that has done better. $10,000 invested in 1985 became $8.3 Million in 2005. Not bad…
Anyhow, I thought I’d post a few notes from John’s notes at CSInvesting. So these are notes from notes… just a few highlights. I strongly recommend you read the whole document, as well as bookmark John’s site. There is a lot to learn there.
Here are some quick thoughts from the first part of the compilation of notes from Greenblatt’s class:
Prices move in much wider yearly ranges than values do.
In other words, prices are much more volatile than values. This creates opportunity for investors. (He says to look up the 52 week ranges for any big-cap stock like WMT, GOOG, CSCO, AAPL, etc… you’ll see yearly stock price ranges of 50-100% consistently. There is no way the actual values of those companies move around that much during the course of each year. He said he doesn’t really know for sure why this occurs over and over, but he doesn’t care. He only wants to take advantage of it by buying what’s undervalued when the market offers it.
Beating the market is very achievable, but not easy. You have to know how to
- Value companies and
- Wait for the right price
So why don’t people beat the markets? He says most people are smart enough, especially on Wall Street, but they are too short term oriented and they don’t put their valuation work in the proper context. He said markets are most inefficient on a 3-5 year time horizon (this is a very important part of where my own edge comes from). The ability to look past where most people look (next quarter or next year) is absolutely crucial. Patience is a big edge.
How has he been able to compound money at 40% per year for 20 years? By simplifying his thinking… like Jim Rogers, he sits around and does nothing until there “is money lying on the floor and all he has to do is walk over and pick it up”. He is content to do nothing until he finds the right opportunity.
I love Greenblatt’s humble attitude and outlook. He has previously stated that he’s no smarter than the average money manager and he doesn’t do better analysis. So how can he outperform so dramatically? The answer is patience and the method he uses to implement his investment philosophy. He swings at fat pitches and passes on anything he doesn’t understand. He thinks differently than the crowd. Like Templeton said:
It is impossible to produce a superior performance unless you are doing something different from the majority.
These notes represent more of the conceptual side of Greenblatt’s ideas. They are very simple, basic investment principles:
- Value investing works (low P/E, P/B, P/FCF, etc…)
- Prices move around much more than value does, consistently creating opportunities for profit.
- Think of stocks as part ownership of real businesses
- Invest using a margin of safety
- Know your circle of competence
- Take advantage of Mr. Market’s irrationality (As Buffett said “Profit from the folly rather than participate in it”)
- Do simple things. Investing is not hard. Do things you understand.
- Invest with 3-5 year time frame (perhaps the biggest edge and most inefficient part of the market because it’s the part where most investors don’t/can’t/won’t participate in because of emotions and lack of patience).