In recent interview with CNBC, author, investor and Columbia University finance professor Joel Greenblatt talked about the challenges faced by value investors.
“My students ask the same question,” he said, adding, “I’ve taught at Columbia for 23 years, and I always make a promise to my students on the first day of class—that if they do good valuation work, the market will agree with them. I just never tell them when.”
Greenblatt underscored periods of growth and contraction in the S&P 500 over the past twenty years, specifically:
1997-2000: the index doubled;
2000-2002: it halved;
2002-2007: it doubled;
2007-2009: it halved;
2009-today: it tripled
“That’s my way of saying that people are still crazy and very emotional,” Greenblatt argued. Add to the mix the fact that time horizons have shortened considerably, and investors can check share prices throughout the day. “For the long-term investor,” noted Greenblatt, “that creates a lot of emotion and volatility in the sort-term.” That said, he argued, “if you can keep your cool, there are lots of opportunities out there.”
Greenblatt explained that he defines value investing differently than most, who base the definition on price-book and price-sales ratios. “We value businesses and try to buy them at a discount,” he explained, likening the approach to that of Buffett mentor Benjamin Graham.
“The secret,” Greenblatt concluded, “is to have a steady, disciplined process to value companies and be confident enough to stick with it.”