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Asking Joel Greenblatt A Question - Closed

June 08, 2009

guruek

80 followers
Since we announced Investment Guru Joel Greenblatt will conduct a Q&A with our users last Friday, we have had overwhelmingly positive response. So far, twenty questions have been raised (including some loaded ones). Here is the un-edited summary:


Question 1. (grol1971) 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.

Question 2. (grol1971) 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?

Question 3. (batbeer2) 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 ? 

Question 4. (rajeev_agr@yahoo.com) 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.

Question 5. (charliet) 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? 

Question 6. (valueradar) 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?

Question 7. (valueradar) Do you think you learned any lessons from the great market crash of 2008? if yes, what are those?

Question 8. (valueradar) 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?

Question 9. (valueradar) Do you think the macro economics important in value investing? 2008 seems to prove that micro economics is extremely important.

Question 10. (jonmonsea) 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...?

Question 11. (nport) 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!

Question 12. (buffetteer17) 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?

Question 13. (buffetteer17) 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?

Question 14. (goulzc) 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.

Question 15. (djswinney) In my opinion your two books are the best investing books out there. Do you have any plans to write another one? If so when and what will it be about?

Question 16. (Callaquin) 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?

Question 17. (Callaquin) what is the amount of leverage if any used by the fund during it's operation?

Question 18. (jdt) 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?

Question 19. (chumash) 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.

Question 20. (chumash) 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.?


We will keep the door open for a couple of more days till this Friday. If you ever wondered whether and how Magic Formula Investing works, raise your hands and ask the question you always want to ask. You will be answered by the inventor himself.

Registered users (including Free Members) can continue to post questions by replying or commenting on this thread.


Rating: 2.8/5 (16 votes)

Comments

AndreHeggli
AndreHeggli - 5 years ago
Do you use technical analysis to any degree in your investemnt operation?
AndreHeggli
AndreHeggli - 5 years ago
Do you have any ratios you use to screen stocks, like Price/FCF or PEG?
AndreHeggli
AndreHeggli - 5 years ago
What posts in the financial statement do you think are important to study extra? Post where numbers are often manipulated, where you find out if they are.
AndreHeggli
AndreHeggli - 5 years ago
What are you reading now? Do you recomend any other books? What articles do you recomend?
Bertrand
Bertrand premium member - 5 years ago
Hi Joel, thank you taking the time to answer our questions.

1. Firstly, 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 ?

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

3. What are your thoughts on the European website version of 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 ?

With many thanks from France. Bertrand

Bertrand
Bertrand premium member - 5 years ago
One last question sorry... 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 ?

Again thank you.
bubka20
Bubka20 - 5 years ago
What are you thoughts on the next couple of years for retail? What are you thoughts on SPACs?
kidchoi
Kidchoi - 5 years ago
Of all the various stock databases available to the common retail investor, such as Gurufocus, Morningstar, Barrons, Yahoo, Valueline, etc, I do not find one that calculates and displays the ROIC figures. Furthermore I cannot screen based on ROIC data myself. I can only find a listing from your Magicformula site, which I have used but would like to do my own screening using other screening criteria. Where can I find this or how can I go about getting it. Am I missing it? I agree with the Magicformula methodology, whereby consistent & high ROIC is a key metric in finding investable businesses. it would be even better to display the ROIC figures on a 10 year+ basis. Gurufocus, is this possible for your data to include this together with a screener???
bart329
Bart329 - 5 years ago
How much of your investing success can be attributed to your uncommon emotional temperament?
htcoleman
Htcoleman - 5 years ago
On page 96 of the Little Book that Beats the market, you state that if you "do a good job valuing a company, Mr. Market will eventually agree with [you]." What resources would you recommend for those of us who want to work on our ability to value a company?
htcoleman
Htcoleman - 5 years ago
What were the results for the Magic Formula in 2005, 2006, 2007 and 2008?
htcoleman
Htcoleman - 5 years ago
In the FAQ section of the Magic Formula Investing web site, you mention that you "have made some common sense adjustements to simple measures of earnings yield and return on capital." Would you please let us know what these adjustments are?
htcoleman
Htcoleman - 5 years ago
In the FAQ section of the Magic Formula Investing web site, you mention that you "have made some common sense adjustements to simple measures of earnings yield and return on capital." Would you please let us know what these adjustments are?
boomerwcc
Boomerwcc - 5 years ago
Which value investors do you most respect today? Why?
commodity
Commodity - 5 years ago
Does the Average Joe have any real chance of getting rich in the stock market?

How do explain how Bill Miller lost so much money so fast ?
commodity
Commodity - 5 years ago
Does the Average Joe have any real chance of getting rich in the stock market?

How do explain how Bill Miller lost so much money so fast ?
commodity
Commodity - 5 years ago
Does the Average Joe have any real chance of getting rich in the stock market?

How do explain how Bill Miller lost so much money so fast ?
olesenc
Olesenc - 5 years ago
What do you think about GGP (unsecured bonds + the equity)? Also, what do you think is the single biggest risk in GGP if you buys the unsecureds plus the equity?
ConsumerMonopoly
ConsumerMonopoly - 5 years ago
Besides your own books (which are awesome by the way) and books such as the Intellgent Investor, Security Analysus, etc., what would you recommend reading to get a leg up in investing? Any periodicals that you think are worth perusing? Thank you Prof. Greenblatt!!! You are cool brutha!
williase
Williase - 5 years ago
A couple of years ago, you recommended AXP at the Ira Sohn Conference. What is your view on a purchase of AXP at current prices?
freddy3621
Freddy3621 - 5 years ago
If you were just starting out, managing $2mm, how would you try to raise money, in this environment, to get your assets to $15mm to $20mm? Assume you have no connections to money (i.e. wealthy friends or relatives).
htcoleman
Htcoleman - 5 years ago
Do you anticipate that the formation and operation of Formula Trading will have a negative impact on the investment results of individual investors following the Magic Formula? Why or why not?
hgoldhagen
Hgoldhagen - 5 years ago
Three main questions:

1. Why hold each security for only 1 year if it can take a few years to recognize the value of a business? Why not hold for 2-3 years or more? Did you figure the returns on the MagicFormula based on a holding period of longer than 1 year and if yes, what are the results? If no, can you do the calculations and give the results?

2. Based on the current recession and economic climate, would you add additional screeners to increase the return of the average portfolio of stocks, for example a company with little or no debt?

3. The MagicFormula screener spits out stocks ranked against each other. So, if the market as a whole is overvalued, the best ranked stock may just be the least overvalued and may not be cheap compared to its intrinsic value. Is there another screener that can be added to determine if the stock is actually priced at discount to intrinsic value without having to know how to value a company? Is it better to hold more cash when the market as a whole is overvalued until a correction occurs rather than continuing to invest in MagicFormula securities?

Thank you for taking the time to answer all our questions.
hgoldhagen
Hgoldhagen - 5 years ago
Three main questions:

1. Why hold each security for only 1 year if it can take a few years to recognize the value of a business? Why not hold for 2-3 years or more? Did you figure the returns on the MagicFormula based on a holding period of longer than 1 year and if yes, what are the results? If no, can you do the calculations and give the results?

2. Based on the current recession and economic climate, would you add additional screeners to increase the return of the average portfolio of stocks, for example a company with little or no debt?

3. The MagicFormula screener spits out stocks ranked against each other. So, if the market as a whole is overvalued, the best ranked stock may just be the least overvalued and may not be cheap compared to its intrinsic value. Is there another screener that can be added to determine if the stock is actually priced at discount to intrinsic value without having to know how to value a company? Is it better to hold more cash when the market as a whole is overvalued until a correction occurs rather than continuing to invest in MagicFormula securities?

Thank you for taking the time to answer all our questions.
DaveinHackensack
DaveinHackensack - 5 years ago
Why did you set the minimum market cap to $50 million on your new Magic Formula screener, when users used to be able to enter a market cap as low as $1 million? Did you find that the Magic Formula does not work as well for stocks with market caps below $50 million? If so, would you mind reimbursing me for the money I've lost buying Magic Formula stocks with market caps below $50 million1?

In your book The Little Book that Beats the Market, you alluded to the dramatic under-performance of a certain investor's2 strategies in the few years after he published a book on those strategies. Do you think it's a coincidence that the few years following the publishing of your book have been difficult times for adherents of the Magic Formula as well? Is it possible that, by the time someone decides to write a book on an investment strategy, that strategy is typically due for a period of underperformance?

1A joke, Prof. Greenblatt. I find that having a sense of humor helps in handling market losses.

2You didn't mention this investor by name, but I believe you were referring to James O'Shaughnessy.

htcoleman
Htcoleman - 5 years ago
What risk/reward characteristics do you look for in an investment? Do you have a set amount of potential upside to potential downside that you are willing to take on? If so, what is it now and what has it been in the past for you?
Tonic79
Tonic79 - 5 years ago
Dear Mr Greenblatt,

Thank you for taking the time to answer questions, as well as authoring the two of the most profound investment treatise I've ever read.

Your books spell out quite clearly many of the qualities you look for, which seem to be relatively generic. A good company, based on its high ROIC, in combination with a low price. Does that also inherently imply that you never fall in love with a stock and by association, will not hold onto a stock for the long term? Is it simply identifying a good cheap stock and flipping it as it becomes pricier?

My second topic of questioning has to do with metrics. Your books seem to point to the ROIC as one of the few ratio's you use to judge a company. However, this would seem to indicate that you do not focus on industry or company specific issues. I assume this is an incorrect conclusion for me to reach? If that is so then might I ask how does an investor go about determining the most appropriate metrics, for example the combined ratio in insurance, for different industries and their constituent companies? Does is simply come down to reading everything you can about the industry at hand and by trial and error determining the most appropriate 4 or 5 metrics per industry? Or is there an alternative answer that you would be willing to share?

Once again thank you for your time and your willingness to teach and share ideas.

Warm Regards,

Damian Roy

Student - University van Amsterdam

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