In a recent Masters in Business  podcast interview with Bloomberg columnist Barry Ritholtz, investor, professor, author and co-chief investment officer of Gotham Asset Management Joel Greenblatt talks about his early days in investing, the concepts behind his books, and his firm’s investing methodology.

Here are highlights from the interview:

• Greenblatt recalled first becoming interested in Benjamin Graham’s strategy as a junior at the Wharton School.  At the time, he was being taught the efficient market theory which, he said, did not resonate–when he read about Graham’s approach, he said, “a light bulb went off…and I started reading everything I could about what he had written, both security analysis and the intelligent investor,” which led him to Warren Buffett.
• On the lagging performance of value stocks, Greenblatt points out that his definition of value is “not low price-book, low price sales investing” but rather figuring out what the business is worth and paying “a lot less.” According to his definition, he argues, stocks are “ownership shares of business that you value and try to buy at a discount,” and if analyzed that way, “the way most academics and many advisers and managers look at the world just seems kind of insane.”
• Greenblatt offers in-depth explanations of the concepts he presents in his 2007 book The Little Book That Beats the Market regarding how to value businesses (including how to measure return on tangible capital).
• Regarding active management, Greenblatt argues that in order to beat the market you have to “do something different” than the market is doing, something a minority of active managers are able to accomplish. His firm’s creation of the Gotham Index Plus fund was an effort to “help individual investors take advantage of the fact that we think we know what we’re doing.”  He offers an in-depth explanation of the fund’s investing strategy and methodology.
• Greenblatt advises, “you have to look after caveat emptor in the investment world like everywhere else, most people are trying to sell you things, they have an angle, it is very hard for you to discern who is or who isn’t on your side unless you do the work yourself and know what you’re doing.”
• The reason investors don’t beat the market, according to Greenblatt, is largely due to investor behavior: “People are still emotional,” he argues. “If you’re cold and calculating go back to what we talked about in the beginning where stocks are ownership shares of businesses…you can really take advantage of the market.”
• Greenblatt explains the concept behind his book The Magic Formula: “We used some simple quantitative methods to show people concepts of Ben Graham who said buy it cheap.” Graham’s student Warren Buffett extrapolated on that idea, Greenblatt notes, and “we have used that philosophy, that’s what I teach at Columbia and that’s what we’ve used to make money over the last 37 years.