Joel Greenblatt is a current investor who is still very active in money management. He runs a firm called Gotham Capital. Gotham started as a hedge fund in 1985, where Greenblatt built one of the best 10 year track records that I am aware of: compounding his capital at 50% per year from 1985-1994. At the end of that period Greenblatt returned all of his partners’ capital. He continued investing the same way he did previously, but only with his own money. Although I haven’t seen any documented results after 1994, many people close to Greenblatt say that he averaged in the neighborhood of 30% per year after 1994. I’ve read that he averaged around 40% annually from 1985-2005 (I think some people just took the 50% from the first 10 years and averaged it with the 30% from the second 10 years).
However you slice it, despite being much younger than the other Superinvestors, Greenblatt is one of the greatest investors of all time. Although he has one of the best track records I’ve ever seen, he is not a household name among individual investors. He strikes me as modest and humble, and although a best selling author, he seems to stay out of the limelight.
Greenblatt wrote one of my top 5 favorite investment books of all time called You Can Be a Stock Market Genius (as most people say, it’s a cheesy title, but it’s the best book ever written on special situation investing). I consider that to be by far his best book of the three he’s written, but he is likely most well known for his book The Little Book that Beats the Market, which lays out his “Magic Formula” and its very impressive backtesting results of around 30% per year from 1988-2004. I highly recommend both books, along with his most recent book The Big Secret for the Small Investor.
These three books are very readable, and are filled with both common sense concepts and practical approaches to creating an investment strategy. It’s a breath of fresh air to listen to Greenblatt discuss his investing philosophy. No Ivy-League sophisticated verbiage from Greenblatt, just things like “Value investing means you figure out what something’s worth and you pay a lot less for it” and “We like to find stocks that are cheap and good“.
- Founder of Gotham Capital
- Best Selling Author
- Became interested in value investing as a college student when he read a Forbes article on Ben Graham’s statistical approach to investing
- Prior to starting Gotham, he ran a small partnership that bought stocks using Graham’s net-net formula. He averaged roughly 20% per year for a couple years while he ran the partnership
- Although his investing foundation comes from Ben Graham (like many other Superinvestors), he preferred a less diversified strategy in the early years of his career. According to his own estimates, he was making 100% per year in his own account while working for an investment firm prior to starting Gotham
- Started Gotham with a few million of assets under management (AUM) and built his asset base to a few hundred million ten years later
- Averaged 50.0% per year from 1985-1994 without a single down year, establishing a legendary track record that is better than any other I’m aware of
- Reportedly continued investing from 1994-2005 using a similar focused strategy that resulted in further abnormal returns over the next 10 years
- Recently founded a group of mutual funds that employ his systematic approach to value investing
Greenblatt Investment Philosophy:
- Greenblatt is a value investor. His ideas are founded in the Graham and Dodd principles.
- Although his philosophy is Graham, his strategy was much more focused than Graham’s while running Gotham. He usually held between just 5 and 10 positions in his highly concentrated portfolio
- Believed that concentrating on his best low risk ideas created the best opportunity for huge performance
- However, in the last 10 years he has become more interested in quant investment styles, developing his “Magic Formula” approach to stock selection, highlighted in his second book.
- The “Magic” Formula is simply a combined ranking of Return on Invested Capital and Enterprise Value/EBIT (a variation of the more well known P/E ratio). Greenblatt called these inputs “Good” and “Cheap” factors. He was looking for companies that were both good and cheap.
- This formula had, and continues to have, extraordinary outperformance
- Greenblatt still feels that a focused approach to investing will yield higher returns, but a formula approach (buying a more diversified basket of quantitatively undervalued stocks) is an approach he now prefers due to it’s simplicity and diversification, yet still above average return potential.
- You Can Be a Stock Market Genius (a must read for Enterprising Investors)
- The Little Book that Beats the Market (a must read for Defensive Investors)
- The Big Secret for the Small Investor
- Video of Greenblatt at the 2009 Value Investing Congress explaining his Magic Formula (outstanding presentation)
- GuruFocus interview with Greenblatt
- Outlook Business Interview with Greenblatt
- Summary of the above interview thanks to MagicDiligence.com
- Outstanding blog post on the Magic Formula by Toby Carlisle of Greenbackd (one of my favorite investing blogs)
- Greenblatt interview from the Graham and Doddsville newsletter
Greenblatt interview with Steve Forbes discussing his Magic Formula
Part 2 of his interview with Forbes discussing the Magic Formula
Another interview with Forbes
Greenblatt on the origins of the Magic Formula
CNBC Interview: The Little Book that Still Beats the Market