How does Joel Greenblatt distinguish between 'naive' and 'mastery' simplicity?

Greenblatt distinguishes them by understanding the concept immediately. Mastery simplicity, for him, means seeing a clear, large gap between a business's value and its price, making it obvious without needing extensive spreadsheets.

What is the advantage of writing and teaching for an investor like Joel Greenblatt?

Writing and teaching force an investor to articulate their thoughts clearly, potentially revealing gaps in their understanding. It allows for curation of examples and simplification of complex ideas, leading to deeper learning and better communication.

How does Joel Greenblatt find investment opportunities that others miss?

He looks for opportunities that are complicated, different, or not immediately obvious to others. This involves looking at things from a different angle or finding them in 'off the beaten path' locations, similar to how his in-laws found art.

Why did Joel Greenblatt limit the capital under management at Gotham Capital?

Greenblatt intentionally limited capital to stay within his 'circle of confidence' and focus on opportunities that have asymmetric returns. He believes a 'fat wallet' can be the enemy of high investment returns.

What is Joel Greenblatt's approach to position sizing?

Greenblatt prioritizes position sizing, believing it's more important than the 'best' idea. He sizes positions larger when he believes the risk of loss is minimal, focusing on asymmetric returns where potential downside is limited relative to upside.

How does Greenblatt view the current market with high IPOs and companies losing money?

He sees large tech companies like Amazon and Google as fundamentally strong, justifying their valuations. However, he notes froth in companies losing money, suggesting a potential market correction but not a systemic collapse, especially given the shift towards expensing long-term investments.

What is the most important factor when evaluating a management team?

The most crucial factor is their past track record of allocating capital effectively. Greenblatt believes that if a management team has historically been good at allocating capital, they are likely to continue being good, and vice versa.

What are Joel Greenblatt's thoughts on stock options as compensation?

Greenblatt believes stock options should be fully accounted for as a cost and predicated on long-term value creation. He advocates for incentivizing employees and management similarly to how shareholders are incentivized.

What has Greenblatt learned from running charter schools like Success Academy?

He learned the importance of a replicable model that supports average teachers to become great, focusing on relentless hard work and high standards. He also observed that proving an effective model doesn't automatically guarantee widespread adoption or political support.

What is the concept of alternative certification proposed by Greenblatt?

Companies should set standards for tests, courses, and certificates that can substitute for a college degree, enabling individuals to access high-paying jobs based on skills and demonstrated competencies, thereby fostering a more diverse talent pool.

Key Moments

What makes a GREAT INVESTOR? | Episode 111 Joel Greenblatt

The Knowledge Project

People & Blogs4 min read77 min video

May 18, 2021|62,234 views|1,160|48

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Key Moments

TL;DR

Joel Greenblatt on great investing: simplicity, patience, and knowing when to size positions.

Key Insights

Great investors distill complex ideas into simple concepts and have a deep passion for problem-solving.

Identifying investment opportunities requires looking at things from a different angle, not just relying on readily available information.

Patience is crucial; great investors wait for 'easy pitches' within their circle of competence, rather than swinging at every opportunity.

Position sizing is paramount, focusing on the potential downside rather than just the potential upside to manage risk effectively.

Successful capital allocation by management is a key indicator, with past performance in deploying capital being more reliable than future promises.

Despite market volatility and the prevalence of money-losing companies, focusing on fundamentally sound businesses with long-term potential is key.

THE HALLMARKS OF A GREAT INVESTOR

Joel Greenblatt emphasizes that great investors possess a combination of simplicity of thought and passion for problem-solving. They can distill complex investment ideas into a few core, understandable concepts. This clarity allows them to identify attractive opportunities where the potential value significantly outweighs the current price. Beyond intellectual rigor, a genuine passion for figuring things out, rather than mere pursuit of money, distinguishes long-term successful investors. This intrinsic motivation fuels the dedication needed to navigate market complexities and persevere through challenges.

FINDING OPPORTUNITIES IN UNCONVENTIONAL PLACES

Greenblatt highlights that genuinely great investment opportunities often lie off the beaten path. Instead of outperforming others through superior analysis of commonly available data, successful investors find an edge by looking at things from a different perspective or in overlooked areas. He likens this to finding art at auctions or yard sales, where the value is recognized by a discerning eye, rather than predicting future stars. This approach requires looking beyond the crowd and identifying situations where a different angle reveals overlooked potential, making the opportunity obvious once seen correctly.

THE POWER OF PATIENCE AND WAITING FOR THE RIGHT PITCH

A cornerstone of Greenblatt's philosophy is the importance of patience and waiting for the right investment 'pitch.' This means not feeling compelled to invest constantly but rather selecting opportunities that fall squarely within one's circle of competence and are convincingly attractive. He draws parallels to Warren Buffett's advice on not having to swing at every pitch. This 'wait-and-see' approach, coupled with the ability to recognize truly simple and obvious opportunities, is crucial. Missing many opportunities (errors of omission) is less detrimental than making poor investment decisions due to impatience or lack of conviction.

MASTERING POSITION SIZING AND RISK MANAGEMENT

Greenblatt stresses that effective position sizing is arguably the most critical aspect of investing, even more so than identifying the 'best' ideas. He advocates for a risk-based approach, sizing positions based on how much capital could realistically be lost, rather than the potential upside. This often means taking larger positions in investments where the downside is limited and asymmetric returns are probable. Being too timid on genuinely good ideas, even if they have the potential for significant gains, can be a major mistake. This disciplined approach to risk ensures that even substantial investments do not lead to catastrophic losses if things go wrong.

EVALUATING MANAGEMENT THROUGH CAPITAL ALLOCATION

Assessing a management team's competence is best done by evaluating their past capital allocation decisions. Greenblatt believes this historical performance is a more reliable indicator than subjective interviews or future projections. If a management team has a track record of making smart decisions about where to invest the company's resources, it's reasonable to assume they will continue to do so. Conversely, poor past capital allocation suggests a company may struggle regardless of its stated strategy or how impressive its leaders appear. This focus on proven actions over eloquent words is key to identifying effective stewards of capital.

NAVIGATING MARKET IRRATIONALITY AND LONG-TERM VALUE

While acknowledging the market's capacity for irrationality and the rise of speculative companies, Greenblatt maintains focus on fundamentally strong businesses. He suggests that while many companies might be overvalued, great franchises like Amazon or Google possess unique qualities and growth trajectories that justify their valuations. He also notes that accounting practices often lag behind evolving business models, making some money-losing companies appear less attractive than they might be long-term. The key, he emphasizes, is to create long-term value by treating employees, customers, and the environment well, a strategy that ultimately earns market recognition.

THE IMPORTANCE OF DISCLOSURE AND TRANSPARENCY IN ACCOUNTING

Greenblatt views accounting primarily as the 'language of business' and emphasizes transparency over strict adherence to complex rules. While acknowledging its necessity, he believes that understanding the economic reality behind the numbers is more important than memorizing every accounting standard. He advocates for clear disclosure of all relevant financial information, including costs and expenses, so investors can make informed decisions. If a company's reporting is intentionally obscure, he suggests that this opacity is a red flag, signaling a potential unwillingness to be transparent with stakeholders.

LESSONS FROM EDUCATION AND DIVERSE TALENT

Drawing parallels from his work with charter schools, Greenblatt underscores the potential within underserved populations. He highlights that with the right support and high standards, even disadvantaged students can achieve at high levels, challenging the notion of inherent limitations. This principle extends to the workforce, where companies can unlock immense value by developing alternative certification pathways. By setting clear skill standards, businesses can foster an ecosystem that allows individuals without traditional degrees to gain credentials and access high-paying jobs, ultimately tapping into a broader pool of valuable talent.

Mentioned in This Episode

●Software & Apps

●Companies

●Organizations

●Books

●Concepts

●People Referenced

Common Questions

Great investors possess a combination of simplicity of thought, the ability to boil down complex ideas into a few core concepts, and a genuine passion for solving puzzles and figuring things out. They often wait for their 'pitch' and look at things from a different angle than the crowd.