Is it harder to invest today than it was in the past? This is a commonly asked question among investors of all stripes, and many believe that the answer to it is yes - there have been many market developments over recent decades that have made it harder to effectively allocate capital. These changes include the proliferation of high-frequency traders, the increase in the number of hedge funds and algorithmic trading systems.
However, there are also reasons to be hopeful that these challenges are not insurmountable. In a talk with students at the Wharton Graduate School of Business, value investor Joel Greenblatt (Trades, Portfolio) explained why small, special situations investing will continue being a lucrative space.
Too big to move fast
Greenblatt, who teaches a class on value investing at Columbia, often gets asked by his students whether investing is harder today than it was when he started out in the early 1980s. To this he says:
"People who are good at special situation investing - really looking off the beaten path, at liquidations or reorganizations or spinoffs - many of them are liquidity-constrained. Warren Buffett (Trades, Portfolio) started making a lot of money doing these things, but then he grew too big. And so I tell my students that people who get really good at analyzing businesses in this area make a lot of money. And then they get too big to stay there, so there's always a new group of people coming in and looking at these smaller situations."
Buffett has said on many occasions that he could probably achieve very high annual returns - as much as 50% - if he were managing a sum like $1 million, as opposed to the almost $150 billion that he currently manages as the head of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). This is good news for the average investor. It's easy to find reasons why investing might be more difficult in 2020 than it was in 1980, but if you stick to situations where the bigger players aren't able to exert their influence, it's still possible to find good opportunities.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Seth Klarman: The Value of Not Being Sure
- The Value Investor's Handbook: The Enduring Appeal of Value Investing​
- Warren Buffett: Owning Part of a Business vs. Owning All of It
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