What makes a GREAT INVESTOR? | Episode 111 Joel Greenblatt

KEYPOINTS

• 01

  Good investors combine simplicity and passion.

  Joel Greenblatt has graded investment write-ups for decades. He has taught at Columbia since 1996 and co-founded the Value Investors Club in 1999 with John Petry. Two traits separate the best. First, can they explain simply why an idea makes sense? Second, are they in it for the puzzle rather than the money? He knows many people who are smarter, and who can build a 40-page spreadsheet better than he can. But echoing Buffett, if you need page 40 to see it's a good investment, it isn't. You want to be able to 'drive a truck between' value and price.

• 02

  Skip what you can't figure out, and wait for your pitch.

  Ask him how to value a business with fierce competition, constantly changing technology and endless new products, and he says: skip it and find one you can figure out. Like Buffett, you don't have to swing at every pitch. Swing at one of 20, do it well, and misses don't matter. Errors of omission are fine. Don't get frustrated waiting. Experience helps you recognise when something ranks among the best ten or twenty ideas you've seen in a decade.

• 03

  The edge is where and how you look, not better analysis.

  Greenblatt opened You Can Be a Stock Market Genius with his in-laws, who browsed country auctions and yard sales in Connecticut. They never asked whether an artist would be the next Picasso. They asked whether the same artist's work had just sold at auction for double or triple the price. Their advantage was finding it off the beaten path. His successes rarely came from out-analysing others. They came from looking somewhere others weren't, or 'tilting your head' at something everyone was viewing the wrong way.

• 04

  Keep capital small enough to stay in your sweet spot.

  Off-the-beaten-path opportunities can't absorb much money. So Gotham Capital, founded in 1985, returned half its outside capital after five years, and all of it after ten. It had done well enough to keep its staff, and the move forced it to stay small. Greenblatt quotes Buffett: a fat wallet is the enemy of high investment returns.

• 05

  Size positions by what you can lose, not what you might make.

  Greenblatt calls position sizing perhaps the most important thing. Put 2% into a stock that goes up tenfold and it may be your worst investment, because it should have been 10–20%. Being too timid on the few great ideas is the biggest mistake. But his largest positions aren't the ones he thinks will go up five or ten times. They're the ones where he's looking down: a $10 stock with $9 in cash, no debt and a small business attached. Risk means what a reasonable, unleveraged holder could lose if they can choose when to sell over a couple of years — not crash-day prices. As he wrote, if you don't lose money, most of the other alternatives are good.

• 06

  Judge management by its capital-allocation record, not its story.

  Greenblatt and partner Rob Goldstein, who joined in 1989, visited many management teams. Nearly all were smart and had a good story about the future. The reliable rule: if they allocated capital well before you walked in, assume they'll continue; if badly, assume the same, however logical the pitch. It's like hiring. Interviews correlate poorly with performance, so talk to people who've worked with them. He hired Goldstein despite a terrible interview because it reminded him of his own — and Goldstein said something that made total sense.

• 07

  Accounting hides some investment as expense.

  Salesforce paid about $50,000 to a third party to migrate Gotham onto its system, far more than a year's fees, betting on eight to ten years of customer lifetime value. Amazon's spending on Prime Video and customer acquisition is expensed, but it's really capital spending. So losses don't always mean bad businesses. Still, the 299 companies worth over $1 billion that lost money in 2019 were, as a group, up over 100% that year, through November. Historically that's been the single worst strategy. Each one is priced as if it will be the next Amazon, Google or Microsoft, and most won't be. If he can't figure a company out, it goes in the too-hard pile.

• 08

  Long-term value requires treating stakeholders well.

  Stock options are fine if disclosed and tied to long-term value. You don't create long-term value by cheating customers, mistreating employees or polluting, and only short-term appearances come that way. His advice to public-company management: do the right thing over the long term, explain the quarter honestly, and don't play for analysts. The market does reward real long-term visionaries like Bezos. If he can't decipher a company's statements, he assumes that's intentional and moves on.