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Joel Greenblatt interview with Steve Forbes (7/5/11)


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Joel Greenblatt talks about his latest book, The Big Secret for The Small Investor.  The "big secret" is that small investors have a longer time horizon than institutional investors, and can "time arbitrage".  Most of the interview is Joel talking about his value weighted approach, and the 4 new mutual funds he has created.  He believes they will perform at least 6-7% better annually over time than market cap weighted indexes like the S&P 500 Index.

 

Here is the link to the interview (26 minutes).

 

http://blogs.forbes.com/steveforbes/2011/07/05/joel-greenblatt-interview-transcript/

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I've become less enchanted with Greenblatt over the last few years as he has worked to push his version of indexed products onto the street. I wish he would have stopped after You Can Be A Stock Market Genius.

 

Could you elaborate on why you think he should have stopped? I'm curious to know if you think what he's doing is bad, or if you think it's simply not for you but could work for other people?

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I wish he would have stopped as I now find him to be a biased source of information (for one), as opposed to a professor trying to articulate possible ways to apply the value investing craft.

 

His consistently repeated phrase about losing 200 bps of performance, for instance. What does he base this on? Is he saying that if you bought the S&P 500 index instead of the S&P 500 equal weight index you lost 200 bps over the past decade? This would be perfectly obvious as small and midcap names outperformed large caps in the past decade. I would bet significant sums of money that the S&P 500 index will outperform an equal weight S&P 500 over the next decade based on current valuations alone. I just find these types of comments to be marketing throw aways so that he can get money into his fundamentally indexed product.

 

Also, he notes that over the last few decades buying stocks with the lowest P/E's has worked better than it has in past periods, and that people should just continue to buy names with low multiples...I agree that it is a great starting point, but not an investment strategy. How much of that increased success of reversion to the mean strategies is due to easy money policies in the Western world over much of the past 30 years? Do you know how many people buying low P/E, higher debt/equity names got an arm chopped off in the crisis and would have lost everything had QE been prescribed in a lower dosage?

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i wish he would have just opened up a fund for the average joe that he and his team managed in the very same way they managed to get 25% per annum returns.

 

Can't do that with billions under management.  His current goal is to probably manage a trillion.  In his defense, he is probably doing it for the public good - not to get richer. 

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Frankly, I'm put off by any book that has the word "genius", "magic" or "secret" in it, and purports to tell you how easy something is.  I've thought that Greenblatt has been supremely magical at marketing his books over the last few years.  I do not use, nor follow the magic formula, or anything else that looks like fairy dust!  ;D  Cheers!

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Frankly, I'm put off by any book that has the word "genius", "magic" or "secret" in it, and purports to tell you how easy something is.  I've thought that Greenblatt has been supremely magical at marketing his books over the last few years.  I do not use, nor follow the magic formula, or anything else that looks like fairy dust!   ;D  Cheers!

 

Have you looked at his first book, though? I'm in the middle of reading it for the first time after seeing it highly recommended by people like Geoff Gannon and other value bloggers, and there's no magic formula so far in that one. It's all about analyzing spinoffs and merger equity offerings and such. Definitely over the head of the average investor, which is why he's been trying to make it easier and easier with each book, but interesting stuff for most on this forum, I bet.

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Have you looked at his first book, though? I'm in the middle of reading it for the first time after seeing it highly recommended by people like Geoff Gannon and other value bloggers, and there's no magic formula so far in that one. It's all about analyzing spinoffs and merger equity offerings and such. Definitely over the head of the average investor, which is why he's been trying to make it easier and easier with each book, but interesting stuff for most on this forum, I bet.

 

You're talking about "You Can Be a Stock Market Genius", right?  I thought it was dumbed down...sort of like Peter Lynch's "Beat the Street".  Better than his two recent books, but I didn't really like it.

 

Yah his first book is probably the best value book in the last 20 years.

 

Not even close!  Seth Klarman's "Margin of Safety" is hands-down the best investment book written in the last 20 years.  Cheers!

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Have you looked at his first book, though? I'm in the middle of reading it for the first time after seeing it highly recommended by people like Geoff Gannon and other value bloggers, and there's no magic formula so far in that one. It's all about analyzing spinoffs and merger equity offerings and such. Definitely over the head of the average investor, which is why he's been trying to make it easier and easier with each book, but interesting stuff for most on this forum, I bet.

 

You're talking about "You Can Be a Stock Market Genius", right?  I thought it was dumbed down...sort of like Peter Lynch's "Beat the Street".  Better than his two recent books, but I didn't really like it.

 

Yah his first book is probably the best value book in the last 20 years.

 

Not even close!  Seth Klarman's "Margin of Safety" is hands-down the best investment book written in the last 20 years.  Cheers!

 

Pff, Publisher: HarperCollins (October 1991)

 

I guess that wins.

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I have Klarman's book (in PDF) and liked it a lot, but didn't learn too much from it because I was already familiar with Graham and Buffett. Always good to refresh your memory, but the Greenblatt book taught me a bunch I didn't know about spinoffs, so that's got to count for something.

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Guest Hester

I agree that MOS was the best book of the last 20 years, and I agree that Greenblatt's titles are ridiculous, but despite this, his first book was very very good. I wouldn't dismiss it just because you don't like the title.

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His consistently repeated phrase about losing 200 bps of performance, for instance. What does he base this on?

 

 

Joel Greenblatt says the market cap weighted S&P 500 loses 200 bps of performance annually, because the S&P 500 Index by definition will overweight companies whose stock has risen, and underweight companies whose stock has gotten cheaper. 

 

Joel's mutual fund approach is the exact opposite - he underweights stocks that have risen, and overweights quality stocks that have gotten cheaper.

 

I heard an investor say a funny comment - it is easy to beat the S&P 500 index, just buy all the stocks in the index and remove the airline stocks!

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Guest Hester

I heard an investor say a funny comment - it is easy to beat the S&P 500 index, just buy all the stocks in the index and remove the airline stocks!

 

Tom Gaynor at the Markel brunch this year said that, among other places. Not sure if it is original to him, but it's funny and probably true. I'd love to see it backtested.

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Tom Gaynor at the Markel brunch this year said that, among other places. Not sure if it is original to him, but it's funny and probably true. I'd love to see it backtested.

 

That would definitely be interesting to do, but in the real world, friction costs would probably make this a lot less practical than a low-cost index.

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Guest Hester

Tom Gaynor at the Markel brunch this year said that, among other places. Not sure if it is original to him, but it's funny and probably true. I'd love to see it backtested.

 

That would definitely be interesting to do, but in the real world, friction costs would probably make this a lot less practical than a low-cost index.

 

For an individual yes, but for an index fund or ETF to set this up there would actually be less transaction costs than a low cost index. All they would have to do would be copy every holding/transaction in the S&P 500 (or the Russel, or the Wilshire, or any index they are tracking) except for the airline stocks. Since they omit the airline stocks there would be less stocks and therefore less ongoing friction costs once the fund is set up.

 

Even if it would add just 1% long term, it would be worth it as there is really no extra work once the index is set up.

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Tom Gaynor at the Markel brunch this year said that, among other places. Not sure if it is original to him, but it's funny and probably true. I'd love to see it backtested.

 

That would definitely be interesting to do, but in the real world, friction costs would probably make this a lot less practical than a low-cost index.

 

For an individual yes, but for an index fund or ETF to set this up there would actually be less transaction costs than a low cost index. All they would have to do would be copy every holding/transaction in the S&P 500 (or the Russel, or the Wilshire, or any index they are tracking) except for the airline stocks. Since they omit the airline stocks there would be less stocks and therefore less ongoing friction costs once the fund is set up.

 

Even if it would add just 1% long term, it would be worth it as there is really no extra work once the index is set up.

 

Couldn't an individual investor easily replicate this by buying an S&P 500 index fund normally and then taking a short position in airline stocks worth a few percent of that purchase (or shorting some other airline ETF)? 

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If it was so obvious/certain that airline stocks would underperform the broader market going forward, we could all be very rich men by shorting airline stocks and buying the S&P 500 in proportion.  It's not that easy.  That being said, I would never invest in an airline. 

 

 

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I don't think shorting airlines, or doing some sort of pairs trade, would be smart, so I agree with Given2, but not buying them is.

 

It really is obvious long term that airlines in general will underperform. But if something underperforms the market, and is still positive, the short will lose money obviously. Shorting something that has a 0% long term return is silly. The volatility and costs of shorting isn't worth it.

 

I think the only excess profits to be made on airline stocks would be this strategy, staying fully invested in the non-airline stock market. There will be some times of underperformance relative to the normal index, like the last couple of years, when airlines happen to do well. But over the next 20 years I see no reason it wouldn't outperform. It's a replacement strategy.

 

Unless something in the future is structurally different, I see no reason why the next 50 years shouldn't be like the last 50 years, zero profits overall for the airlines.

 

Just my opinion. I'm not going to do this but would love to see the backtest.

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What I don't understand is, in his latest book he goes over himself to recommend ETFs as a tax efficient structure and the best way to go.  Now he released mutual funds?  Maybe ETFs are harder?

 

He answers that in the interview. ETF rules mean he would have to report his transactions too often and he feels that this would make his funds lose some of their added value.

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