Gotham Capital co-Chief Investment Officer Joel Greenblatt (Trades, Portfolio) recently sat down for an interview with CNBC in which he outlined some of his recent thoughts on the market and on the future of value investing. Greenblatt, who is also a professor at the Columbia Graduate School of Business, combines an academic knowledge of his discipline with hands-on experience of the markets.
Where the market is priced now
“I tell my students: let’s go back 20 years when you guys learned how to read and take a look at the most followed market in the world, the United States, the most followed stocks - the S&P 500 … From ‘97 to 2000 the S&P 500 doubled, from 2000 to 2002 it halved, from 2002 to 2007 it doubled, from 2007 to 2009 it halved and from 2009 to today its roughly tripled. That was my way of telling them that people are still crazy and very emotional. The S&P 500 is an average of 500 names - if you look under the covers of the dispersion of those companies - there are plenty of opportunities … We value the S&P every day from 1990, bottoms-up, the individual stocks on a daily basis so we can contextualise where do we stand today on a valuation basis, and right now we are in the 20th percentile towards expensive, meaning that compared to the last 28 years, the market has been cheaper 80% of the time.”
It should be no secret that the markets have become severely overbought over the course of the last few years, but it is striking to see just how inflated valuations have gotten in percentage terms. Although past history is no guarantee of future performance, it is not unlikely that the market will revert to more reasonable levels at some point soon. This possibility should be embraced by value investors looking to deploy some cash as more and more opportunities make themselves available.
How the internet has shrunk time horizons
“We’re not buying the index, we’re buying the cheapest stocks in the index and we’re long-short investors, so we short the most expensive … The thing that’s going for us that we haven’t had for the last 20 years is, 20 years ago you used to get a quarterly statement and just throw it in the garbage. Now you can check your stock price thirty times a second on the Internet, so time horizons are shrinking, and if you’re a long-term investor that creates lots of emotions, lots of volatility in the short-term. But if you can keep your cool and actually value businesses and have a longer-term horizon - even two or three years nowadays is a longer time horizon, there’s plenty of opportunities there always.”
The ability to get a quote for a stock or portfolio at the touch of a button has undoubtedly made investors more skittish and prone to overreaction. Add to this the proliferation of algorithmic trading and the increase in the sheer volume of trades, and it is no surprise that volatility in stocks has increased over the last 20 to 30 years. This has arguably provided more opportunities for value investors to ply their craft. But at the same time, the point could be made that markets can now remain irrational far longer than they used to. Still, an investor who is able to stay solvent longer than markets can stay irrational should be able to prosper over time.
Disclosure: The author owns no stocks mentioned.