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Q&A Session With Professor Joel Greenblatt -- Closed

June 05, 2009
GuruFocus is pleased to announce that Investment Guru, Columbia University Professor Joel Greenblatt has agreed to conduct an email Q&A with GuruFocus users.

According to the money management firm Formula Trading, LLC ’s website:
Joel Greenblatt is the founder and managing partner of a successful private investment partnership in New York City. He is a professor on the adjunct faculty of Columbia Business School, and holds a BS and an MBA from the Wharton School.


Joel Greenblatt’s accomplishment far exceeds what this brief bio describes. Failed to mention is that he achieved 50% average annual investment return from 1985 to 1995, when he returned all the money back to the external partners.

He is also the author of two books You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits (1999) and The Little Book That Beats the Market (Little Books. Big Profits) (2005).

It is in the second book, He outlined a simple, beautiful, and effective investment philosophy called “Magic Formula Investing”. For the curious minds and those who have not read the book, go to website www.magicformulainvesting.com and try out the stock screener based on the principles outlined in the book.

We recently become aware of that Joel Greenblatt is involved in and becomes the Strategist of money management firm Formula Trading, LLC. We wish the Joel’s new endeavor great fortune.

In the meantime, GuruFocus is thrilled have the opportunity to bring our users access to the great knowledge and insights of Joel Greenblatt.

To ask a question, you can post questions by click on "Reply to this message". We will collect and edit the questions and send to Prof. Joel Greenblatt.

We will post the questions and answers once we receive them back.

So fire off your questions to the good professor in value investing!

About the author:

guruek
Ravi Nagarajan is a private investor and Editor of The Rational Walk website. Ravi focuses on applying value investing techniques to find securities trading well below intrinsic business value. Ravi has over 15 years of experience in the financial markets and started investing on a full time basis in 2009. From 1996 to 2009, Ravi held a number of technical and executive level positions in the commercial software industry. Ravi graduated Summa Cum Laude from Santa Clara University with a degree in finance. Visit his website The Rational Walk

Visit guruek's Website


Rating: 2.8/5 (30 votes)

Comments

grol1971
Grol1971 premium member - 4 years ago
Professor Greenblatt,

Two questions:

1. Traditionally your portfolios have been very focused. What do you think about the Bruce Berkowitz's investment in PFE, which accounts for more than 20% of Fairholme Fund.

2. Could you share your thinking about the relationship among long-term earnings stability, long-term ROE/ROIC and valuation levels (PE, PS)? How do you think about the dynamics of these three variables when valuating a company?

Thanks and regards,

Gustavo

batbeer2
Batbeer2 premium member - 4 years ago
Some notable investors such as Benjamin Graham, Philip Fisher and yourself are also well respected teachers.

In your view, do good teachers and intelligent investors share any particular qualities ?

rajeev_agr
Rajeev_agr - 4 years ago
Prof Greenblatt

In the magic formula investing you suggest a simple scheme of buying the cheapest stocks and sell them every year after a year. A few questions:

- How do you ensure that beyond the statistics there is nothing else that is going on about the company which will cause its value to remain depressed or worse go down?

- Do you actually use the magic formula for any of your investing? If yes what are the additional criteria you use once the magic formula has identified the first set of stocks?

A few additional questions:

- How often do you evaluate your portfolio and when do you decide to sell a stock?

- What are the key attributes of being a successful investor?

- What is the best way to get into asset management? I have been investing on my own and pretty successfully and I am now looking at opportunity to manage money for others.

- What are the some best sources to get good investment ideas.

Thanks.
charliet
Charliet - 4 years ago
Proffessor Greenblatt, it seems from your portfolio that you weren't very active in the market in the past two years. You had a concentrated portfolio before and recently you came back with a very diversified portfolio in 2008. Then it seemed that you sold almost everything. Was it because you saw the crash coming? Why did you switch funds and can we invest in your new fund? If so, how? What do you see the market and the economy doing in the next few years? Thanks.

valueradar
Valueradar - 4 years ago
1. In your magic formula, you use return on capital and earning yield to rank the companies. It seems that we will get a lot of cyclicals at their earnings peak, when the earning yield is high and return on capital is high, too. However, that is the worst time to invest in cyclicals. How to avoid this with the magic formula?

2. Do you think you learned any lessons from the great market crash of 2008? if yes, what are those?

3. 2008 was a bad year for value managers. A lot of very respectable value managers lost around 50% or even more, and had permanent losses. What do you think went wrong with value investing?

4. Do you think the macro economics important in value investing? 2008 seems to prove that micro economics is extremely important.

Thank you very much!
jonmonsea
Jonmonsea premium member - 4 years ago
Buying companies with high ROIC and low P/E was the strategy of your last book. Going forward in what Bill Gross has termed a "new normal," how do you look at sustainability of ROICs across the market, esp. as they relate to various industries, now that leverage is less easily available. Do you see the market returning 3% after inflation with 10% ROIC, or what? Where do you see the most sustainable moats in preserving relatively un-leveraged ROICs, where the companies are selling at attractive earnings yields? Industries/specific names...?

Many thanks, Joel!
nport
Nport - 4 years ago
Professor Greenblatt, why does your revised website not continue to list ROIC and Earnings Yield for each selection? I like to do my own analysis and found these numbers very useful. Is there some way, you might reincorporate them for they give great meaning to your insights!
buffetteer17
Buffetteer17 premium member - 4 years ago
I suspect that Magic Formula investing has not done well from about Oct. 2007 to Apr. 2009, simply because pretty much all stocks got beaten down. Of course it isn't intended to work well for such short periods of time. What if a conservative investor followed the Magic Formula through this period, but was short the major market indices (S&P, Russell, or others)? How would he have done? In other words, in this current bad time as well as other bad times for the market, did the Magic Formula continue to beat the market averages?

Since the Magic Formula ranks stocks from best to worst, it is possible to produce a list of the worst stocks as well as the best. How would an investor who shorted the worst stocks have done?
goulzc
Goulzc - 4 years ago
Prof. Greenblatt,

The variables you suggest to use in your magic formula (p/e, roe) are based on accounting figures which we know are only approximations of the economic reality underlying the true performance of the firm. Do you make any adjustments to the accounting figures used in your formula and if so which ones.

Thanks,

Chris
Callaquin
Callaquin - 4 years ago
Proffesor Greenblatt: Your fund's returns (gotham) greatly outperformed other value and "value" funds. What would you say were the seven most important things that gave you (and continue to give you?)an edge over lesser managers?
Callaquin
Callaquin - 4 years ago
Also, what is the amount of leverage if any used by the fund during it's operation?
jdt
Jdt premium member - 4 years ago
Because free cash flow growth requires not only high returns on capital but also a reinvestment opportunity, have you explored adding a criterion to the screen that would indicate the presence of a significant opportunity for reinvestment?
chumash
Chumash - 4 years ago
Hi Joel,

Can you recommend financial instruments with asymmetrical return qualities (high upside but limited downside) that allow you to express a view on a particular stock, sector, or economic event.

For example, John Paulson shorted the bonds of the lowest tranches of CDOs backed by subprime mortgages to express his view that overall sub-prime mortgages defaults were going to rise. His downside was the spread with treasuries (which in 2007 was only 100bps) while his upside was a 100% return if the low tranche bond was wiped due to a mere 200-300 bps increase in mortgage default rates. A great call for Paulson but more impressively was how he figured out the optimal instrument to express his views.

I'd appreciate your insight into any other instruments/investment procedures that have similar risk/reward properties.

Thanks ,

Mike

chumash
Chumash - 4 years ago
Hi Joel,

To followup on my previous question, what instrument would you recommend to use if you believe that interest rates will rise in the next 6m, 1yr, 2ys.

Thanks!

Mike
Bertrand
Bertrand premium member - 4 years ago
Hello Joel, thank you for taking the time to answer our questions.

1. Do you ever use the inverse of the magic formula (low EY and low ROC) as a base for further screening when you look to short stocks, if ever ? If so how do you complement it.

2. What do you think is the best stock database out there for screening stocks? Reuters, Bloomberg, Valueline, or simply Gurufocus ?

3. What are your thoughts on the European website version of magicformulainvesting.com, magicformulainvesting.eu , operated by two Belgian private bankers?

4. Are you seeing a lot of special situation investment opportunities at the moment, and if so can you discuss any which have caught your attention ?

5. Are you planning to write another book anytime soon, and if so centered around what particular investment theme ?

6. While reading your biography or rather from what is available on the internet, I noticed you graduated in 1980 and founded Gotham in 1985. I was wondering what you did during that 5 year interim ? Did you work at a hedge fund or in banking, and if so in what area ?

With many thanks from a fan in France. Bertrand
wjsmiley
Wjsmiley - 4 years ago
Any plans on including non-US stocks?

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