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Joel Greenblatt

Joel Greenblatt founded Gotham Capital in 1985 after graduating from Wharton with an MBA in 1980. He has written two books, The Little Book That Beats the Market and You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits. Make that three books, The Big Secret for the Small Investor is worth reading, but ultimately a great sales pitch wrapped in knowledge.

I’ve read and enjoyed You Can Be a Stock Market Genius a couple of times. Greenblatt skillfully makes complex topics seem simple and spins a great story, injecting lots of humour. It’s a great book though it did seem strangely familiar to Seth Klarman’s Margin of Safety. Stock Market Genius highlights Greenblatt’s love of special situations and shows investors where to look and how to think if they want to delve into this lucrative niche in the market.

I haven’t read the Little Book That Beats the Market, but have used the site Magic Formula Investing to screen for stocks. You now need to register to use the site.

As Greenblatt explains in the interview linked below his holding statements, 13Fs, only paint a partial picture of his holdings. However, it can’t hurt to take a look for new ideas. While source documents are always the best place to look Guru Focus makes it a little easy to keep a rough eye on Greenblatt.

Answers From Joel Greenblatt at gurufocus.com

A few of my favorites [books] are: “The Essays of Warren Buffett” edited by Lawrence Cunningham, “Moneyball” by Michael Lewis and “The Invisible Heart” by Russell Roberts.

I still believe that for good business analysts a concentrated portfolio is a good strategy combined with a long term horizon. Actually, last year should give pause to people who think diversification among many stocks in an equity portfolio results in a significant degree of added safety versus owning stakes in a few well-chosen companies.

My goal is to buy a company at a low multiple to normal earnings power several years out and that the company earns good returns on capital at that level of normal earnings.

I usually just look at a simple multiple to normalized earnings. If I can buy something at a very low multiple and I have confidence in the earnings stream, I don’t have to calculate a DCF to know whether I want to buy it.

When to sell is always a difficult question. Big picture: I usually try to sell before my investment reaches a conservative estimate of fair value. In other words, I usually sell too early. In addition, I may sell before an investment reaches even that discount to conservative fair value if I find something else a lot cheaper and it makes sense to make the exchange after looking at my overall portfolio.

I think investors should have a large portion of their assets in equities over time. I don’t know too many people that are good at timing the market relative to macro-economic events. I think time horizon (which will be partially affected by a person’s age) should affect your allocation to equities.

When doing in depth analysis of companies, I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of “normal” earnings power over time. My goal is to buy a company at a low multiple to normal earnings power several years out and that the company earns good returns on capital at that level of normal earnings.

Warren Buffett always said that investors should be prepared to lose 50% on their investments in the stock market at any particular time, last year was apparently such a time. So, investors should probably keep this in mind along with their expected time horizon when making allocations to equities. On the other hand, after a year like 2008, there are probably many more opportunities in the equities markets than before.

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