Why Spinoffs

[BG2008]

Couldn't say it any better.  Buffet talked about the guy in camp who are really good at net balls in table tennis.  Sometimes, you just got to find these niches where you're that net ball guy and just have fun. 

 

I was at a conference once and Greenblatt spoke.  The way that he talks about dealing with investors while running a concentrated portfolio, you can tell it was mentally exhausting despite the numbers that he put up.  He talks about how at times, he's down 20% upon waking up and he would feel depressed.  It's amazing how someone with 50% gross CAGR can openly admit to such "tough grinds" at times 

 

For me Greenblatt, not Buffett, is the authority on this because of his track record in investing in special situations.

 

2- I would just study Warren Buffett.  His track record is better than Joel Greenblatt's. 

 

I don't think this is correct. Joel Greenblatt's public track record for the 10 years he had his hedge fund, which did exactly the type of investing he describes in You Can Be a Stock Market Genius, was 50.0% per year gross/40% net of incentive fees. I don't think that Buffett beats this in any 10 year period.

 

Buffett's track record is very long and he is one of the richest people in the world.  I don't see Greenblatt putting up a similar performance when he hits Buffett's age.

 

No, Greenblatt is the authority here. Buffet's only identifiable track record dates back to the 60s.

 

Guys, what is your point? Nobody disputes that Buffett is a great investor. I don't dispute that he may be a better investor than Greenblatt and I know that Greenblatt talks about being Buffettized. And achieving high returns on billions instead of millions is simply another league – it's incomparable.

 

What you can't say, though, is that Buffett has the better track record, when there is no ten year period in which Buffett had better returns than Greenblatt managing similar amounts of money. Saying "spin-offs are bad investments because Buffett is the better investor" just doesn't make any sense. This is especially the case, because Greenblatt's 10 year track record is simply insane – and he achieved it by investing in special situations, of which he says spin-offs are his favorite. We're talking about the attractiveness of investing in spin-offs after all, aren't we?

 

I think the point is that some investors equate Buffett's wealth with god-like status.  If he's so rich then he must be the smartest person in the world, and if we must mimic his actions we'll all be as smart/wealthy/good looking as he will be too. 

 

For my money I'd say Greenblatt is the authority here.  He literally wrote the book on this stuff, he generated incredible returns then got out at the top and shifted his style.  Yes Buffett is richer, but I don't consider riches to equal authority, although most of America disagrees.

 

There are a LOT of little market niches, many of them will have insane profits laying in the bottom for those who choose to specialize.  I think the key is finding the niches and exploiting them, it worked well for Greenblatt.

 

A last thought, not everyone has this weird drive to have the most money in the world and work their entire life.  Some are happy with 'enough' and getting out of the game.  In some past interviews I read of Greenblatt that seemed to be the case with him, he had enough money and was tired of running a fund, dealing with investors.

 

+1  I would add something, if there was something to add.

[CorpRaider]

Greenblatt is the best for my money.  Though Buffett was/is a bargain for $100K a year.

[Kiltacular]

Not that it really matters and I like both Buffett and Greenblatt just fine without having to choose between the two, but if we could rerun history, I'd be curious to see how Buffett would have done with Greenblatt's starting AUM during the 1985-1994 period during which Greenblatt had his amazing run.

 

Buffett's famous "I guarantee you I could do 50%/year with small amounts" (which might actually mean it's what he was doing at the time in his personal account with small sums) during a nice steep bull market would be fun to see.

 

I agree.  It doesn't really matter -- at least to me (either).  But, just looking at the 1985 - 1994 period for Berkshire is telling.  Wasn't Berkshire's reported change in book value per share net of corporate tax? 

[Guest wellmont]

greenblatt does not even advocate doing special situations anymore for most people. he really has gone over to the good business at a cheap / reasonable price approach. and doing it mechanically by formula, ala graham. here is one brilliant investor who does not "concentrate", and still manages to get great results. from my reading of greenblatt, and this goes back to his first book, is that he doesn't believe deep dives into arcane minutia adds value. his book was targeted, as Lynch did, toward the average everyday investor.

[Palantir]

 

I agree.  It doesn't really matter -- at least to me (either).  But, just looking at the 1985 - 1994 period for Berkshire is telling.  Wasn't Berkshire's reported change in book value per share net of corporate tax?

 

An (leveraged) operating firm's change in book value is totally different from a fund's performance.....

[bmichaud]

EXACTLY!! The Hempton's of the world who focus on the tiniest outrageous detail are not sailing around the world in Yachts. Doesn't take a rocket scientist to figure out if someone weighs over 300 pounds...

[CorpRaider]

Re Greenblatt:  Here's a link to a recent interview which most have probably read.  With the following quote:

 

"Does the more regimented and diversified

style of his new funds mean he’s concluded

his original strategy is less viable?

Not at all, he says: “Were I starting out

again, I’d do it exactly the same as before.

With the concentrated hedge fund strategy

we made very high returns over a long

period of time and I was okay with the

volatility because I knew the underlying

securities very well and as long as they remained

cheap, I had no problem sticking

with them. The approach now is probably

the better strategy for most people. We’re

still fundamental value investors and I

expect very good long-term returns, but

the ups and downs should be much less

severe. That means people are more likely

to stick with it, which should turn out far

better for them in the long run.”

 

https://www.gothamfunds.com/UploadFiles/968ee205-e.pdf

[LC]

Good read, thx CorpRaider

[CorpRaider]

EXACTLY!! The Hempton's of the world who focus on the tiniest outrageous detail are not sailing around the world in Yachts. Doesn't take a rocket scientist to figure out if someone weighs over 300 pounds...

 

Icahn has a somewhat relevant post today on his new yahoo finance blog that you may find interesting.  In the post he acknowledges that he's a devout "reductionist".

[Kiltacular]

 

I agree.  It doesn't really matter -- at least to me (either).  But, just looking at the 1985 - 1994 period for Berkshire is telling.  Wasn't Berkshire's reported change in book value per share net of corporate tax?

 

An (leveraged) operating firm's change in book value is totally different from a fund's performance.....

 

That's a good point.  It's not a fair comparison.

[yadayada]

greenblatt does not even advocate doing special situations anymore for most people. he really has gone over to the good business at a cheap / reasonable price approach. and doing it mechanically by formula, ala graham. here is one brilliant investor who does not "concentrate", and still manages to get great results. from my reading of greenblatt, and this goes back to his first book, is that he doesn't believe deep dives into arcane minutia adds value. his book was targeted, as Lynch did, toward the average everyday investor.

You have to take these things in context. These guys cannot advocate some complicated strategy that requires quite a bit of work. Where you have to understand financial statements and business models quite well. Most people will listen to that advice and mess it up, so it is safer for them to just buy a good business for decent price and forget about it. When they make these general statements, they just advocate the thing that people are least likely to mess up. Finding and analyzing these special situations takes a certain type of effort that most people are not willing to put in.

[rukawa]

@lu_hawk

 

That explanation was just what I was looking for. Thanks. Absolutely brilliant.

[jouni1]

some people buy spin offs, some buy old companies and some people buy companies that generate lots of non-profit sales. and that's fine with me. at this point in his life i think it's already safe to say that warren did ok. so if everyone buying AMZN at 1/8th prices was right, buffett has been right for decades and keeps on going. if he levered and got good results, then he did the right choice because it paid off.

 

or does this way of rating past decisions only work on people who invest in growth stocks (that are not joined at the hip :D)?

[Valuebo]

Maybe soon people will start claiming Buffett is wrong again for not buying internet companies like AMZN. They did after all say that in the nineties. That would be like saying that Usain Bolt is not a good athlete because he hasn't run the marathon in under 2:30. He easily could with some practice, but why would he if he is far better in something else? Silly.

[ukvalueinvestment]

Interesting.

 

I'm not sure Usain Bolt could run a marathon in under 2:30.  That is an elite time, he's just not build for it.

 

Any sports scientists out there?

[peter1234]

I was at a conference once and Greenblatt spoke.  The way that he talks about dealing with investors while running a concentrated portfolio, you can tell it was mentally exhausting despite the numbers that he put up.  He talks about how at times, he's down 20% upon waking up and he would feel depressed.  It's amazing how someone with 50% gross CAGR can openly admit to such "tough grinds" at times 

 

Thanks for sharing this. I have always wondered whether he just had nerves of steel.

 

Looks like he is human after all...

:)

[writser]

Maybe soon people will start claiming Buffett is wrong again for not buying internet companies like AMZN. They did after all say that in the nineties. That would be like saying that Usain Bolt is not a good athlete because he hasn't run the marathon in under 2:30. He easily could with some practice, but why would he if he is far better in something else? Silly.

 

I've read on this forum that Buffett should've bought Amazon and Salesforce. We are at that point already.

[merkhet]

Every time someone tries to compare InvestorX to InvestorY and argue which one was better, all I hear in my head is "Girls. Girls. You're both pretty. Can I go home now?"

 

https://www.youtube.com/watch?v=xmFXEcI_AA4

 

Am I the only one?

[yadayada]

When I see people talking up twitter and how they invested in it, I picture them like this:

 

[LC]

Every time someone tries to compare InvestorX to InvestorY and argue which one was better, all I hear in my head is "Girls. Girls. You're both pretty. Can I go home now?"

 

https://www.youtube.com/watch?v=xmFXEcI_AA4

 

Am I the only one?

 

No you're not :D

 

[coc]

When I see people talking up twitter and how they invested in it, I picture them like this:

 

 

Come on. You don't say "Creep, creep" unless you're quoting TLC...

[rukawa]

By getting spun off from LLL, the EGL business was no longer subject to that constraint, and projects that previously would have been off-limits to them (because the hardware business was going to bid on it or was already working on it), could now be bid on.

 

(The SAIC spin was done for the same reasons.  But it was done a little over a year after the EGL spin was done and by that time the general rally had progressed to where it wasn't common to see spin-offs really sell off much.)

 

I am guessing the Vectrus/Exelis(EGL) is being done for the same reasons.

[Patmo]

For me Greenblatt, not Buffett, is the authority on this because of his track record in investing in special situations.

 

2- I would just study Warren Buffett.  His track record is better than Joel Greenblatt's. 

 

I don't think this is correct. Joel Greenblatt's public track record for the 10 years he had his hedge fund, which did exactly the type of investing he describes in You Can Be a Stock Market Genius, was 50.0% per year gross/40% net of incentive fees. I don't think that Buffett beats this in any 10 year period.

 

Warren Buffet is amazing and his accomplishments are to be respected and studied, but there are better investors out there as well. Nobody is the best in the world at anything for 60 years straight, let alone the most competitive "game" in the world. Joel Greenblatt is probably top shelf, and there are a plethora of others that nobody knows that are really damn solid.

 

When I read or hear people talking Buffet with their "mental model inventory" this and their "wonderful, wonderful" that, citing their favorite Buffet quote as proof that their argument is right, I can't help but think of kids mimicking their favorite sports athlete. Lebron always wears red caps? Man I'm only wearing red caps from now on! Sid Crosby said in an interview that to be good at hockey you need to practice team plays? Man I'm never doing individual drills again! It's like there's no place for individual thought, if you don't go full Buffet you might as well put yourself in the trashcan where you belong.

[ukvalueinvestment]

As I said in another post, I don't think you can really opine on "who is the better investor"?  There are so many variables including: risk taken/macroeconomic environment/underlying market environment/luck/market structure, to name a few.

 

It's the same as comparing sportsmen from two different eras.  Levels of fitness have changed, tactics, nutrition... would Babe Ruth have the same record if he was around today?  Probably not (I know nothing about baseball).

 

 

 

 

[merkhet]

It turns out, someone has already made this into a meme.

 

http://www.quickmeme.com/img/70/7038c6b355e9a725b5a6411618bf17e4ce8a46b8b560c90031aaa051febf027c.jpg