During a recent interview at the CFA Society New York, author and legendary investor Joel Greenblatt offered perspective and insights regarding the state of value investing and its future outlook.
Here are some highlights:
· Greenblatt defines value investing as buying shares of a strong business at a discount. “The whole value versus growth thing is a little bit off,” he said, arguing that low price-book and low price-sales metrics are factors more than indicators of value stocks. He illustrates his point using a real estate metaphor: “I wouldn’t go out and buy houses based on which had gone up in price the most over the last year. You would kinda laugh at me.”
· If you define value stocks based on the expected cash flows of the underlying business over time, he asserts, “it’s never going to go out of favor.”
· Valuation is key to the process of evaluating value stocks, says Greenblatt, who has taught at Columbia for 23 years. “I promise my students every year that if they do good valuation work the market will agree with them.” He quips, “I just never tell them when.”
· On the subject of whether value investing is dead, Greenblatt again cited his teaching experience. Once each semester, he says, a student asks whether they will still have a chance to succeed at value investing given the competition presented by new technologies and computer models. Greenblatt responds by pointing out the performance record of the S&P 500 over the students’ lifetimes (approximately 20 years):
o It doubled between 1997 and 2000;
o It halved between 2000 and 2002;
o It doubled between 2002 and 2007;
o It halved between 2007 and 2009;
o It tripled between 2009 and today.
Greenblatt quips, “That’s my way of saying that people are still crazy and emotional about these things.” Markets, he argues, will continue to move in cycles, and that applies to value investing. He quotes Jim Grant (founder of Grant’s Interest Rate Observer) who said that “people eat, breathe and extrapolate.”
· When will value investing come back into favor? Greenblatt says, “My confidence is that valuation works like gravity. When people buy into a growth-at-any-price mentality, that might be true for a small number of companies but it’s not true for most. Right now, my gut tells me that people are overenthusiastic about growth at any price.”
· Greenblatt shared perspective on how he deals with clients that are frustrated or impatient with returns. “I feel I get paid for my strong stomach rather than for my exceptional analytical ability,” he explains. “If everything I did worked every day, every month, every year, then everyone would do it and it would stop working.”
· People are short-term oriented and impatient, Greenblatt argues. In investing, he explains, “you have to be patient with a philosophy that makes some sense.” He adds, “We stick to our process and bring discipline to the table.”
· Greenblatt reflected on his career and what drew him to the principles touted by Benjamin Graham. “I read an article in Forbes in 1977 about Ben Graham’s stock-picking formula,” he recalled, adding, “I was in business school at the time, where they were teaching me how to put together diversified portfolios in three-dimensional space. That didn’t make much sense to me. Efficient markets didn’t seem logical to me.” Instead, he explained, Graham’s principles made sense. “A light bulb went off right away.”