Joel Greenblatt (Trades, Portfolio) has spent a significant portion of his investing career imparting knowledge on those willing to listen. During an interview at the Prime Quadrant Conference in 2018, Greenblatt addressed two ideas that tend to be of particular interest to value investors -- whether index investing is better than active management, and how to be a contrarian buyer.
On passive investing
Greenblatt advised that the average saver and investor should stay away from actively managing their portfolio:
“I really do agree with Warren Buffett (Trades, Portfolio) that most people should just index. If you don’t know how to value companies yourself, and you don’t know how to evaluate managers, then really it’s probably your best choice, and I would say that a majority of people don’t know how to do those things.”
He also suggested that passive investing is a train that is showing no signs of slowing down, and will continue to eat into the business currently enjoyed by active money managers.
“I think the move to indexation, or passive investing, will continue and the drive towards lower fees -- because unless you can prove that you’re adding value as an active manager you have to compete with these passive products that are very cheap - that’s something that will continue. And I am not that optimistic about the active management business -- I think it will continue to be threatened, and to be honest, as well it should be.”
This is unsurprising, given that many professional managers fail to outperform the leading market indices. That said, he said he considers himself to be a beneficiary of this trend, as it has eliminated much of his own competition in the active management field.
On contrarianism
Many investors consider themselves to be independent-minded and contrarian, but that is by definition impossible. Greenblatt said that most people have trouble buying companies that are expected to underperform in the near future, leading to the emergence of bargain stocks:
“People can say they’re contrarian, but most people aren’t. It’s very hard to buy companies that are out of favor -- most of the things we’re buying that are gushing cash have huge returns on capital, yet are getting cheap. How come? Because that’s looking backwards. That’s what they did last year. The reason we’re getting everything we do cheap is that people don’t think the next year or two will be quite as good. And if you’re an active manager, whether you have a long time horizon or not, it’s pretty clear your clients don’t.”
This last point is particularly interesting. Even if money managers themselves have a long-term philosophy, their clients generally don’t. This creates pressure on them to follow the herd and pass up undervalued stocks that aren’t performing well in the here and now. For those who worry that value investing may be dead or dying, the persistence of this market imbalance is something to cheer.
Disclosure: The author owns no stocks mentioned.
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