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Most recent Graham and Doddsville Fall Newsletter 2012


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Interesting Quote from Joel Greenblatt


G&D: In class, you talked about how you try to assess how cheap or expensive the market is at any point in time. Can you talk about your views on the market today and how you look at it?


JG: Sure. Well we’ve looked bottoms-up at each stock in the Russell 1000 Index, the thousand largest stocks in the U.S. by market cap. We’ve looked at those over history, meaning the market-cap-weighted free cash flow yield of the Russell 1000 on each day over the last twenty years and right now we’re in about the 87th percentile towards cheap, meaning that the market as measured by the Russell 1000 on a free cash flow basis has only been cheaper 13% of the time over the last 23 years.  When it has been this cheap, the forward return for the Russell has been about 17% and then about the mid-30’s two years out. That’s not to say that the market’s prospects are better or worse going forward – they’re probably a little below average for the forward period and therefore you could say that perhaps you won’t do quite as well as would be implied by historical returns. But, even in the 50th percentile, you would expect to make 8% or 9% based on the history of the last twenty-something years, so I would just say that if I had a choice between being more long or more short, I’d be more long. It’s a very attractive time to invest in the market, despite the run-ups that we’ve seen in the last year.

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Guest hellsten



Joel Greenblatt talks about something I started a thread about yesterday, i.e. deep value and the difficulty of buying stocks that stink:


There’s a certain medication on the market that’s made by a small pharmaceutical company. This company was considered a very attractive buy according to one of our screens. But I knew why it looked cheap - its key medication was coming off of patent the next year and the stock was priced accordingly. My inclination could have possibly been to override the formulaic recommendation because I knew exactly what was going on. It wasn’t like it was a big secret. I didn’t override anything, however, and the company subsequently figured out a way to extend the patent a little longer which then led to a doubling of the stock price over the next six months. I think that’s really been our experience. Part of the future is unknowable but there are some instances where you can take a calculated risk/reward bet.


Sounds like he doesn't override the results of the formula that often, or ever?

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