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Joel Greenblatt: The results revealed

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Dec 18, 2006
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Annual return rates of 40%? When someone is claiming these kinds of returns, scepticism is justified. After all, with such amazing returns, an investment of $ 10,000 will grow to almost $ 300,000 within only ten years!

Only the world’s best investors are able to make such exceptional returns. And most of them became billionaires. Joel Greenblatt, the founder and managing partner of Gotham Capital and adjunct professor at the Columbia Business School , is one of them. His investment portfolio generated an average annualized return of 40% for over 20 years. In the first 10 years, Greenblatt even achieved annual returns of over 50%!

Maybe you didn’t expect it, but Greenblatts’ investment system is actually quite simple. According to his system, you should buy stocks of relatively good companies (that earn a lot of money), but only when these stocks are relatively cheap. Yes, it is really that simple!

The fact that his investment system is fully automatic is very appealing for us as private investors. You see, because of the elimination of human influences, Joel Greenblatt was able to test the performance of his system very thoroughly.

You are interested in the annualized returns? I will show them in a minute. First, I would like to tell you a little bit more about the system itself.

With Greenblatts system, the first step is to rank the biggest 3500 stocks in the US by determine how good these companies are at simply making money. Next, the same stocks are ranked on how cheap they are on the stock market. The biggest 3500 stocks are chosen in order to have enough trading volume.

By simply adding-up the positions of all separate companies in both rankings, a new, combined ranking arises. By – fully automatically – buying the top 30 stocks of this new ranking, the following results would have been achieved between 1988 and 2004:*

1988 22.1%

1989 44.6%

1990 1.7%

1991 70.6%

1992 32.4%

1993 17.2%

1994 22.0%

1995 34.0%

1996 17.3%

1997 40.4%

1998 25.5%

1999 53.0%

2000 7.9%

2001 69.6%

2002 (4.0%)

2003 79.9%

2004 19.3%

The average annual return during this period is an overwhelming 30.8%. With a ‘market average’ return during the same period of 12.3%, Greenblatts’ system showed an exceptional outperformance!

Joel Greenblatt himself made an extra 10% annual return (he achieved at least 40% annually) because he didn’t follow the system exactly. Greenblatt utilized the ranking system as a first screening method for further research and selection of promising stocks.

If you want to learn more about Greenblatts investment system, you should definitely read my next article as well. Then, I will explain what Greenblatt considers as a ‘good’ company.

By the way, I strongly recommend Greenblatt’s latest book ‘The Little Book that Beats the Market’. It could be one of your best investments ever!

* Source: Greenblatt, Joel, The Little Book that Beats the Market, John Wiley & Sons, Inc., Hoboken , New Jersey , 2006, p. 56.

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