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Joel Greenblatt's investing advice: "Plan not to Panic"

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David Pinsen
Apr 29, 2010
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"Plan not to panic" next time your stock portfolio drops 40%. That was Joel Greenblatt 's most recent advice for retail investors in his latest column on his Magic Formula investing site. So what did Greenblatt do when Mike Burry, a hedge fund manager Greenblatt's Gotham Capital invested with, was down 18% in 2006 (after several years of spectacular returns), due to early, illiquid bets against subprime mortgages -- bets that Burry wanted to hold to fruition? From p.190 of Michael Lewis's book,The Big Short,

Immediately [...] Gotham Capital threatened to sue him.


What distinguished Gotham was that their leaders flew out from New York to San Jose and tried to bully Burry into giving them back the $100 million they had invested with him. In January 2006 Gotham's creator, Joel Greenblatt , had gone on television to promote a book and, when asked to name is favorite "value investors," had extolled the virtues of a rare talent named Mike Burry. Ten months later he traveled three thousand miles with his partner, John Petry, to tell Mike Burry he was a liar and to pressure him into abandoning the bet Burry viewed as the single shrewdest of his career.

Flash forward to the end of 2007. Mike Burry's hedge fund is up about 130%, as his shorts on subprimes pay off. From p. 223 of The Big Short,

Still he [Burry] heard not a peep from his investors.


To his founding investor, Gotham Capital, he shot off an unsolicited e-mail that said only, "You're welcome." He'd already decided to kick them out of the fund, and insist that they sell their stake in his business. When they asked him to suggest a price, he replied, "How about you keep the tens of millions you nearly prevented me from earning for you last year and we call it even?"

If the billionaire professional investor Joel Greenblatt -- who, due to his hedge funds' short positions isn't as exposed to market risk as long-only, un-hedged Magic Formula investors -- has trouble stomaching an 18% decline, why does he expect retail investors to suck it up when they get hammered by a 40% drop?

Granted, Greenblatt isn't alone in this contradiction, and the average retail investor may not know how to moderate market risk on his own, but I wonder if more retail investors will start to seek out market neutral funds, after experiencing two eviscerating cyclical bear markets in the last ten years (during this secular bear market that started in 2000). Compare the performance of one market neutral fund I just found via a search engine (no position) versus the S&P ETF over the last five years:


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