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Stepan Lavrouk
Stepan Lavrouk
Articles (344) 

Joel Greenblatt: Look for the Easy Gains

Why make investing harder than it needs to be?

November 29, 2019

Everyone knows that investing is not easy. A successful investor needs to have competences in a large number of different areas, from accountancy to risk management to asset valuation. Value investor Joel Greenblatt (Trades, Portfolio), co-founder of Gotham Funds, believes that there is no reason to make a hard game even harder. In an interview at the Wharton School of Business - moderated by none other than Howard Marks (Trades, Portfolio), himself a very successful value investor - Greenblatt explained his "easier" approach to investing.

Good opportunities are like paintings at a country sale

Greenblatt is well-known for finding opportunities in what are called "special situations" - unique events like turnarounds, bankruptcies, spinoffs or other such things - where there are few competitors, and price discovery is not efficient. He uses the example of antiquing to illustrate this concept:

“[Here is] a story about my in-laws, who would spend their time antiquing, going to country auctions, going to tag sales, and they were looking for art and antiques that were undervalued… And if they saw a painting by an artist, and they had seen that that artist had just gone for auction with a similar type painting, similar size, similar genre and had sold at auction at 2-3 times the price they could buy it for, they would buy it. That’s a lot different question than asking 'is this painter going to be the next Picasso?' That’s a much harder challenge."

It is much simpler to compare a painting to a similar piece that has been sold for a certain amount of money in the past than it is to determine whether the painter will go on to have an incredible career. The former is backward-looking, the latter is forward-looking. It is obviously easier to read a record of the past than to predict the future.

Markets tend to be efficient and smart most of the time. There are a lot of well-funded and highly-motivated buyers out there, so there needs to be a good reason for why something is selling at below intrinsic value. Greenblatt explains that most great special situations opportunities are by their very nature quite obscure:

“So I opened the book saying that special situations are a little like that - you don’t want to be so smart [and figure out] who’s going to be the next Picasso, you want to look a little off the beaten path because this is a little more obscure - it’s smaller market cap, something strange is going on, and the normal people that follow this aren’t going to look at it because it’s too complicated, or you’re going to have to read a 400-page thing...This was my way of making the challenge easier - find things that are selling sell below their fair value."

There is a caveat to all of this - just because it’s easier to follow Greenblatt’s advice doesn’t mean that it is easy. You still have to “read a 400-page thing that no one wants to read." But at least it’s easier than trying to pick the next Amazon or Google.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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