“Most people have a tough time sticking with active managers who underperform for a period of time. But of course, if you’re going to beat the market, you have to do something different than the market. And active managers will zig and zag differently,” explains Joel Greenblatt, founder of Gotham Asset Management, in a recent interview with Morningstar.
Greenblatt discusses his firm’s disciplined valuation process that uses both absolute and relative value metrics to rank the 2,000 companies in its database, “We stick to it. It works over time.” According to Greenblatt, the vast majority of investors lack the experience and know-how to pick stocks or mutual funds themselves. “Unless you can value a company yourself, and that leaves out 99.9% of the people, you should be going to a professional to do that.” However, he argues, investors are then faced with deciding whether a professional has adequate skill, but the tendency is to simply look at past returns. “Not a good way to do it,” says Greenblatt.
Gotham’s edge, he says, is in viewing stocks as ownership shares of businesses and trying to buy them at a discount. “We just have to explain that to investors,” he says, “because it’s really, really hard for most human beings of any type to stick to something that’s not working in the short term. So they really have to understand it, and that’s what we spend our time doing—educating.” Since, according to Greenblatt, most active managers have a tough time doing that, he believes “the wave to passive will continue.”