Joel Greenblatt Discusses the Thrill of Investing

for a while. Thanks. Fourteen years later, he opens the mutual funds Gotham Asset Management. His index plus was just rated the number one fund out of large cap mutual funds. Uh. Just astonishing astonishing numbers. That that fund is only three years old. It acts as a hedge fund alternative. You

probably know the name Joel Greenblack from his books. He tells the story of why you two can be a stock market Genius was a terrible and accidental title, as well as The Little Book that Beats the Stock Market, The Magic Formula. I'm gonna just shut up and say, with no further ado, A fascinating conversation with Joel Greenblack. I'm Barry Ridholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Joel Greenblatt.

He is the managing principal and co chief Investment Officer of Gotham Asset Management, the successor to Gotham Capital in a manner of speaking. He's also an adjunct professor at Columbia Business School, where he teaches value and special situation investing. He is the author of numerous well selling books, best selling books You Can Be a Stock Market Genius, The Little Book that Beats the Market, The Big Secret for the Small Investor. Joel green Black, Welcome to Bloomberg Ranks.

So I'm excited to us speak to you. I very vividly remember when You Can Be a Stock Market Genius came out uh in the late nineties and exploded. It was sort of out of left field, at least to me, and just was suddenly a really really big book. But let's let's go back and start um early. So I have to ask the question from you Can Be Stock Market Genius, what did going to the Dog Track teach

you about investing? Well? I wrote up in the book that you know, the only place when I was younger, I kind of like gambling, and the only place that would let to sneak in was the dog track when I was on vacation in Florida, and so I used to sneak in with my cousin and we uh got to place bets and have a good time, and you know,

half the fun was sneaking in. But uh, we figured we really had the whole dog track thing nailed when we found a dog that had run uh it's last race in thirty two seconds and all the other dogs had run it in forty four seconds. And we thought, wow, you know, we really have a great dog going to bet on this thing. What were the odds? Oh, we had, you know, very high odds. It was close to I think, which I think is as high as they let it go. And so we thought we were going to clean up. Uh,

and of course we lost. You know, that dog had been running a shorter race. That's why it only ran thirty two seconds. And so you sort of really have to know something when you're betting, and and the same thing for investing. You know, if you don't know what you're doing, Uh, it's and you know, as they say, an expensive place to find out so the dog track, I think was a nice lesson losing you know, two or four dollars. Uh, it was a very cheap lesson for us. So you go to school at Wharton, both

undergrad and graduate. How did you find your way to Wall Street? What was your first job like? Uh, well, I got a summer job on Wall Street first, a kuder people in their research department. And to tell you how long ago it was, uh, we were adjusting financial statements for inflation, which doesn't probably wouldn't be a big seller right now, but for the younger listeners, tell us,

what is this inflation you speak of? Well, you know when you hold your dollars and it buys less and less each year, but less and less was like six or eight percent, not uh, you know, half a percent or one percent or what we've become used to in the last ten years or so. And and what led

you from research into the art of stock picking? Well, junior year, I read an article actually Informs magazine about Ben Graham's stock picking uh formula, and it was really what they used to call net nets or stock selling below their liquidation value. And it seemed very simple to me because I was at Wardant at the time, and they were learning uh, efficient market theory. Uh, and none of it reson it did with me. I was kind of, like I said, interested in gambling, or at least back

speculating or figuring things out and then taking a calculated gamble. Uh. And what they were telling me was don't try. They were saying that no one can beat the market, and the stock prices are efficient and just through simple observation looking at the newspaper and then used to have the fifty two week Hilo prices in the newspaper. It seemed unreasonable that, you know, the fair price was fifty one day and eight months later it was a uh. And that was pretty much every stock had that kind of

range every year. And it didn't make sense to me that the fundamentals of the underlying businesses were actually changing that much. And so when I read Ben Graham, sort of a lightbulb went off just this little article. Then I started reading everything I could about what he had written, both Security Analysis and The Intelligent Investor, and eventually led my way to Warren Buffett, and uh, you know, sort of the rest is history. It's a very good age.

You know. I was younger than twenty one at the time, you know, junior year of of college, to recognize that this was what I was going to be doing the rest of my life. So let's talk a little about value investing. Since you mentioned Graham and Buffett, value has had a pretty rough go of it the past decade, very reminiscent of a similar period of rough performance in the nineties. For those of us with a value tilt in our portfolios, explain why this is a cyclical phenomena

and not the death of value investing. Right. Well, my definition of value is figure out what the business is worth and pay a lot less. It is not low price to book, low price sales investing. Which if you took a look at morning Star, you took a look at Russell and and they analyze what we do. They don't put us in value as value investors. They put us in blend. As Warren Buffett would say, value and growth are tied at the hip. Growth is part of value.

So the way that it's traditionally on uh you know now and categorized is not my definition of value. So what traditionally when people characterize these things low price book, low price sales, those are things that have correlated well in the past with higher returns cyclically, but over time it tends to work because let's say low price book uh, you know, something selling it uh close to its book value. Well, that just means people aren't giving a very high value

to the business itself. They're just sort of valued pretty close to the cost of the assets that were placed in the business and not giving much of a premium. So you would tend to get more than your fair share of companies that are out of favor, meaning because they're price low. But if you are a private equity firm trying to buy a business, you're not buying it

because it's trading close to its book value. You're looking at cash flows and trying to project what they're going to be in the future, and what are you paying relative to that and what's it worth. And that has nothing to do with low price book low low price sales. It really has to do with the cash flow generating

part of the business. So you know, it does not bother me that traditional value as defined by morning Star Russell or whoever else defines it with sort of factor like attributes of individual stocks, has or has not worked. I mean, you know, here's the big thing the way I described as Look, momentum has worked well for the last thirty forty years, not just in this country, but across the globe, with one or two exceptions. The reason we don't we're not momentum investors, and there's no argument

about it. It has. It's just that if it didn't work for the next two years, it could be that it's just cyclically out of favor, like we're talking about, and all we have to do is be patient and it works over the long term. You just have to be a patient investor. Or. It could be that it's

you know, not so hard to figure out. A stock used to be down here and now it's out here, and there's plenty of data and computers and ability to crunch numbers, and plus plenty of research papers that say that momentums worked over a period of thirty forty years. And maybe if it doesn't work over the next two years, the trade has become crowded and it's degraded, and that's

why it didn't work over the next two years. And two years from now, I wouldn't know whether it's just cyclically out of favor of the trades degraded so That's why I'm not a a momentum investor. The reason I'm a value investor. According to our definition is stocks are actually ownership shares of businesses that you value and try

to buy it a discount. They're not pieces of paper that bounce around that you put sharp ratios and sortino ratios and a use computer simulations to balance your portfolios or whatever. It is. Basically, their ownership shares of businesses that you value and try to buy it a discount. So it's certainly possible that the market does not reward my valuations even if I'm right, over the next two years. But that doesn't mean we're gonna stop doing what we're doing.

That's what stocks are ownership shares of businesses, and that's very fundamental to the way we look at everything. And if you actually look at them that way, you can see all of modern portfolio theory and all of the way most academics and many advisors and managers look at the world. It just seems kind of insane when you really boil it down to ownership shares of businesses that you're trying to value, and then you can really sift

through all the confusion. Uh that very smart people have tried to uh put a lot of numbers on the investment business that don't make a lot of sense. That that's absolutely fascinated. Let's talk a little bit about Gotham Capital. You start with about seven million dollars, some of it coming from Michael Milkin. How did that relationship begin and why was Milkin interested in investing with you? Well, the simple story is that I had a friend at Wharton who was one of the first people, uh who was

in Michael Milkin's group. And I had been working at a hedge fund for about three years after graduating from Wharton, and uh, I had always wanted to go out on my own, and I felt I was ready, and I mentioned it to my friend and I said, Gee, if I could raise you know, X dollars, I'd go out on my own. And UH, my good friend uh gave me a call the next day and said, Mike said fine, Yeah, So it wasn't It wasn't quite as easy as that.

You know, I had to negotiate my terms and uh, it was actually kind of a funny story because it was my life and he did, you know, I don't know at the time. Twenty thirty deals a day. I have no idea, but it was my life. And I'm not a very good negotiating at all. But uh, when I was in the room with him, I wanted the terms that I wanted to to run the money because it was going to be my life and I only had one to give and this was one of thirty deals,

and so I wouldn't give in. And we sat in there for an hour while he kept Ronald Perman waiting because he was about to buy Revlon. And you know, I was just like a little tiny deal and I wouldn't give in because you know, like I said, I had a bottom line, which is pretty rare. And he

didn't let you walk. He negotiated like this was the biggest deal of his life, even though I knew it was just you know, something he did, you know, deserted lunch one day or something, and and uh he left the room and because I wouldn't give in, and he sent his brother in, and uh, you know, after half hour, I got the terms I wanted from his brother. And then when Mike got back, he was not very happy. But that's how I got into business. And uh, he was a good partner for me. That's a great story.

So I have to share with our listeners your returns. You you compound from at annually before fees annually be four fees annually after fees five, No, it's fifty. For those ten years it was four fees. That's astounding. That's an incredible run of numbers. So the first question is what's the secret sauce? How you can We all know the eighties and nineties were a boomed time, but it wasn't fifty a year. What was the secret source for

that sort of returns? Well, one of the ways to to get those kind of returns is not to run a lot of money. So after five years in business, we returned half our outside capital to investors. Yes they must have been thrilled. They were not thrilled, but after ten years returned all of it. That would make them really not thrilled because and the other way is to be concentrated. So sixty eight ideas were usually eighty plus percent of our portfolio. So that portfolio management theory doesn't

like that strategy very much. Not diversified, higher risk, blah blah blah. Al Right, Well, Warren Bufett has a good response to that as well. You know, he says, Listen, let's say you sold out your business and you've got a million dollars and you're living in town, and you want to figure out something smart to do with it.

So you analyze all the businesses and towns. Let's say there's hundreds of business and you stick to if you find businesses where the management is really good, the prospects for the business are good, it's run well, they treat older as well. And you divide your million dollars between eight businesses that you've researched well in town. No one would think that's imprudent. They'd actually think that would pretty prudent.

But when you get to call them stocks, and you get stock quotes daily on these pieces of paper that bounce around and put people put numbers on it in volatility and all these other things, where really it's not that meaningful, you know. So in one sense, if you're investing in businesses and you did a lot of research and invested in eight different businesses with the proceeds of your sale, people would think you're a pretty prudent guy.

All of a sudden. If you invested in stocks and did the same type of work, people think you're insane. And it's just an interesting analogy that I always think of when people make fun of me that I was that concentrated. You know. The flip side of that is, imagine if we got prints minute by minute for the valuation of our homes, people would lose their mind. They

wouldn't be able to manage it. So that understood. Imagine if you had a theory of buying homes, I'm going to buy the ones that went up the most less three months or six months. I mean, it's a really good analogy. I usually use the house analogy when people ask me how do we go about and valuing stocks? And uh, people understand it completely when they're buying a house. There's certain things you would do and we don't do any different than owning a business. That makes a whole

lot of sense. So now let me tack to what you're doing currently. So whereas you previously returned a bunch of money to investors and hedge funds and saying, hey, we we don't think there's this can scale enough that we can keep generating these returns for you, now you're you're going the opposite direction and saying okay, we're gonna look for something that can scale, So tell us a little bit about the Gotham Index plus portfolio. We were

talking earlier offline about passive versus active. This is a little bit of both, right, So we didn't run outside money until again, after we returned it all in ninety four, we ran our interview. Had been lucky enough to keep our staff and run our internal money, but in and and how long did you do that? For fourteen years? And then uh, in two thousand nine we started taking

outside money again. Uh. And it was really, you know, really starts really back when I was in business school and I had read that article about Benjamin Graham and actually did a study with a couple of my classmates, Rich Posina, who's a famous money manager now and uh Boost Newberg, who's still a good friend of mine, And we did some work on ben Graham's formulas, and we ended up doing a research paper and having it published in the Journal and Portfolio Management back in about one

And I had always been fascinated by that, and over the years we had really evolved more towards the way Warren Buffett invests not just cheap, but cheap and good. And I've been teaching at Columbia for a number of years. I've been doing that twenty two years now, but you know, at that time, in the early two thousand's, Uh, i'd been doing it for a bunch of years, and we had been making money using the same principles Buffett uses,

you know, buying cheap good businesses. And I wanted to prove that together with my partner Rob Goldstein, I wanted to prove that what I've been teaching my students, what we had been using to make money worked very well. Just like we had shown that Ben Graham's simple methodology still worked back in the seventies and early eighties, I wanted to show that what we had evolved more into the Warren Buffett way of earning money work too. We wanted to prove it in the same way that we

had written that paper about. So we hired a computer analysts that could help us, you know, mind through data, and we came up with some very simple metrics for good you know what, what's a good business? And Uh, if you read through Buffet's letters, he's it's very clear he's looking for businesses that earn high returns on tangible capital um and what that means is every business needs

working capital, every business needs fixed assets. How well can it convert that working capital and fixed assets into earnings? And in the book The Little Book that Beats the Market I, which I really wrote for my kids to understand this, I explained it this way. Imagine you're building a store and you have to buy the land, build the store, and set up the displays and stock it with inventory, and all that cost your four hundred thousand dollars.

And every year, if the store earns two hundred thousand dollars, that's a fifty return untangible capital. Maybe I'll open some more stores. Then I compared it to another store, and I called that store just broccoli. It wasn't It's not a very good idea just to sell broccoli in your store. But you just have to buy the land, build the store, set of the display stock with inventory, still going to

cost you roughly the four hundred thousand dollars. But because it's basically a stupid idea just to sell broccoli, maybe only earned ten thousand dollars. That's a two and a half percent return on tangible capital. And so all we said was all things being equal, much prefer to own the business, that business that can reinvest its money at fifty percent returns, then two and a half percent returns. So that was one metric good. That's what we looked at.

If you read through Buffet's letters, that's the first thing he's looking for. Were The other metric we looked at is cheap. You know, in the analogy I would use as a house. You know, it's a million dollar house, and one question you might ask is how much rent could I get for that thing? And if you're trying to figure out whether that's a good deal or not.

And if you could get eighty thousand dollars a year in rent, that's an eight percent yield in a two or three percent interest rate environment, that today might look fairly attractive. So we sort of looked at how much cash is the business generating relative to the all in cost of buying the business. Then we looked at whether it's a good business. When they have the money, what do they do with it? Okay, So we came up

with two crude metrics for good and cheap. And you know, Ben Graham said, buy a cheap Warren Buffett said, if you could buy a good business cheap, even better we combined those two and uh we used a crude database, you know, simple database that was publicly available, well for a price. It was publicly available, and uh, we went and tested those two simple concepts, good and cheap. It's

not like we spun the computer thousands of times. This was the very first test we did and it came out so phenomenally well that I wrote a book about it, called The Little Book that Beats the Market. That was the very first test we did. That's what I wrote up. But my partner, Rob Goldstein and I looked at each other and said, you know, I would call that the not trying very hard method. We actually know how to value businesses. You know, couldn't we It worked so well

without trying. Couldn't we even improve on this? And so we built a big research team. You know, there's thirteen of us now we have a seven person tech team. And what we're really trying to do is just take advantage of that initial research and actually valuing businesses. And what we discovered was that and we're really building it for ourselves. You know, hey, can we do something with this.

But it turned out that owning hundreds of names and being right on average was actually, Uh, we can make more money because we would have much less volatile returns. We'd have average. We get what we expect more often

by owning hundreds and being right on average. And so it was very easy to put it together as a long short portfolio, buying our favorite cheapest stocks, shorting our most expensive and because we're doing hundreds, and because we're very good at valuing businesses on average okay, as opposed to having to be right on every single one when you're own six or eight. We turned out we made more money because we had spent less time getting negative

returns with a diversified portfolio. When we discovered that we were willing to take outside money again, and this was back in March O nine. Is that we opened our first fund for institutions in March O nine. We are opened our first mutual fund in two thousand twelve. And we made some decisions back in two thousand nine. Number one, we said that most hedge fund managers, because we were

long short investing with leverage, we're charging too much. I had said on Pen's investment board for ten years, us for ten years, and I saw most of the managers out there are not many justify one and a half and twenty or two and twenty. And the other part that's wrong with the hedge fund business is that when people pay those kind of prices, they're not very patient.

So it's the worst of all worlds. You know, you're charging too much to your clients and they don't stay very long because they're, uh, they're impatient when they're they're paying so much. So we made two decisions. One is to you, uh, make our fees very reasonable, so we didn't have a performance fee. We just had, depending on the strategy, you know, maybe a two percent management fee with nothing else on a hedge fund as opposed to two and twenty. That was pretty uh novel at the time.

And the other was that instead of locking people in for a year or two or three, we said, it's monthly liquidity. We don't want to run money for you if you don't want to be with us, and uh, thirty days is not a big gate these days at all. Right, Well, the idea really was is that when you give a gate every September October, people have to decide whether they

want to lock up for another year or two. When you have monthly liquidity, you're never forcing them to make a decision maybe at a long time they can always have their money. And it's not a signaling device to say you should have a short time horizon. Actually for what we do, you need a long time horizon. But what it is is a comfort to know you could always have it and actually the money stick here. So we thought those were two things wrong with the hedge

fund business. People took out it all the wrong times. They're charging too much, so we would leave our investors with more money and ability to have their money anytime. It was actually turned into be a very sticky business, and that's why three years later we were able to get into the mutual fund business not dilute our strategy

because we were not charging exorbitant rates. We weren't charging a performance fee on our hedge funds, and so we were able to turn institutional quality hedge funds into mutual funds without diluting our strategy. If you're charging two and twenty two your or one and a half and twenty whatever it is to your investors, you can't move into the mutual fund space and just charge one and a half or two percent because without diluting your strategy, because

your institutional investors would get upset. So what ended up happening is that we ended up going into the mutual fund area because we were charging very reasonable fees that would also work in the mutual fund area. But this is what we discovered, and this is my long winded way of answering your question, your very good question, how do we get into the Gotham index plus strategy, which

is our new strategy. Well, it turns out, and we know this, but once we were able to come to registered investment advisors who talked to individual investors much more closely than institutionals, uh, institutional clients. The problem with active management in general is that to beat the market, you have to do something different than the market. High active share is, in the parlance of the industry, right, to beat the market, you have to do something different, but

your returns as a result zig and zag differently. So I wrote a book called The Big Secret in two thousand eleven, and I still say it's a big secret because no one bought that or read that. Uh. So I'll just tell you about it. Uh. In it, I wrote up a few studies of remember I wrote in two thousand eleven. So I wrote up the decade two thousand to two thousand ten. This was a period where the market was flat, but the best performing mutual fund

for that decade was up eighteen percent a year. It's just that the average investor in that fund managed to lose eleven percent a year on a dollar weighted basis by moving in and out at all the wrong times. So every time the market went up, people piled into that fund. When market went down, they piled out. When the fun outperformed, they piled in. When the fun underperformed, they piled out. And they took that eight percent annual

game when the market was flat. So that's great on an annualized basis over ten year period to beat the market by eighteen points, But for outside investors, they went in and out so badly that the average investor on a dollar rated basis lost eleven percent a year. UH. And it's astonishing and and and it's typical, uh, even for institutions. I wrote up a study of institutional managers.

So I took a look at the you know that study, which showed the top performing institutional managers for the same decade two thousand and two thousand ten, who ended up with the best ten year record quartile and what did that who ended up in the top quartel, and what did that look like? And that's what the study showed was that of those who ended up with the best tenure records spent at least three of those ten years

in the bottom half of performance. Not shocking, but everyone because to beat the market you have to do something different. You're gonna have periods of outperformed under performance, and everyone did. Seventy of those who ended up with the best tenure records spent at least three of those ten years, at least three of the ten years in the bottom courtile

of performance. And the one I love is that half they ended up with the best tenure record, but they spent at least three of those ten years in the bottom decile, the bottom performers. So you know, no one stayed with them, but that's how you end up with the best record. So here's a conundrum. There's a minority of active managers who beat the market, and it's best over a decade long, yes, and it's very hard to

find them up front before they beat the market. And if you do, it's almost impossible to stick with them because to beat the market you have to do something different than the market. So, you know, picking active managers has been a loser's game for a long time, just even if there are some that win, and it's a minority. I agree, it's a minority. Uh. And so my partner Rob and I took a look at this problem, said, how can we solve this because part of the reason

we're doing this we like making money. But if we're not making money for other people, which is uh, there really is not a lot of sense. And once we got into the mutual fund area, we wanted to help individual investors take advantage of the fact that we think we know what we're doing. So we developed something called Gotham Index Plus. So I was gonna say, West Gray of Alpha Architect, I don't know if you're familiar with

his work, has a piece. I'm sure I'm mangling the UM title, but it's something along the lines even God would lose clients as an active manager, and I just find that hilarious. So what are you doing so differently with the index plus compared to what you were doing previously UM with special situations? And what did your research find about UM? How you could work around this problem

of individuals under performing their own investments. Yeah, so it sounds almost like an impossible puzzle, but I'll tell you how we solved it. We said, number one, most people judge how they're doing, for better or worse, by seeing if they beat the SNP five that's in this country. And so we start at it there. We said, most people are gonna stick with things if it's beating the SNP five hundred, and lose if it's losing by too

much to the SNP five hundred. So we started with that base for Gotham Index plus and we said, you give us a dollar, we're gonna buy the underlying stocks in the SNP five hundred. We're gonna put a dollar into that in the weights of the SNP five hundreds. So you give us a dollar. This is in mutual fund form. You give us a dollar, we recreate the SNP five hundred bottoms up and put a dollar into

the SNP five hundred. Okay, that doesn't sound so hard to do, and don't think of ourselves as charging for that portion. That's pretty easy to do. And you're doing this not with indices but with actual and yes, we buy the individual stocks because as you'll hear in a moment. We're very very tax efficient, so it helps us to own the individual stocks. Then we go out and we buy ninety cents more of our favorite SMP stocks within the mutual fund. And how many are that is that

second the plus part. What happens is we to the two D fifty out of the five hundred stocks in the sn P, five dred that we like the best. We adds more of those in the order in which we like them. So the more we like something, the more we'll add to it. Uh. And then we'll short or we'll sell nine cents worth of the stocks we like the least. So we have a ninety long nine short long short overlay on top of the dollar in

the SNP. But we do some things to mitigate because obviously if we're gonna zig and zag too much, we want to have tracking error but positive tracking. Or people don't mind winning all the time, it's the losing part that they don't like. So we're trying to mitigate the losing parts. So what do we do. We're buying the cheapest stocks we can find and putting ninety cents into them in addition to the index. The dollar in the already in the index, and we're shorting ninety cents of

our least favorite. But we want to balance that, so we have a zero beta on that because we already long a dollar in the market. We don't want to keep the same beta as the market. Number Two, we don't want to drive tracking or so we we don't want to small stock to drive returns. So something's let's say point one percent of the s and P five hundred. We don't want that driving our returns. But we may

really like that stock. We may think it's really cheap, so we will buy more of it, and we may even buy five or eight times more of it, but that's only point oh five or point oh eight percent, not really going to drive returns. Will buy as much as we can, uh, subject to the constraints UH that we don't want to drive too much tracking error. The third thing we do is we balance fundamentals. In other words, the stocks were short of stocks trading at forty hundred

times earnings. These are hope stocks. People really thinking they're buying them now, not on current earnings, but two thousand twenty two. They think it's gonna be really great, so they're buying these these are hope stocks based on the future. They're trading at forty fifty hundred UH times earnings, and but there are other reasons why people like them. Maybe sales are growing really quickly, or other aspects of the

fundamentals are going well, so we balance those fundamentals. So if you took a look at our long portfolio, we have just as good sales growth in the cheap stocks were buying as the expensive stocks were shorting. So it's they're not unbalanced that way. You know the words, We're just getting them cheaper. They're cheaper, we're making comport. We're buying the cheapest stocks we can find. We're shorting the most expensive subject to constraints that keep us in line.

One is there's a zero beta. Two is that small stocks won't drive returns. Three is that we balance fundamental So all we're doing is buying companies they are doing really well and we're just getting them cheaper. And UH as a result, we've been we just passed our three year anniversary and this fund UH we got five stars

from morning Star. But more importantly, we beat all twelve funds in our category, which is March Capital and where the SNP is, and the most important part is is that we didn't do nearly as well as I hope to do in the next three years. UH. This was a very tough period for us. Even though we did very well relative to the other funds, we didn't do

very well relative to our expectations. And the reason for that is because the market with you know, excluding the last two months, went straight up during those three years, UH, with no correct you have a big leverage short. We're short hope stocks the ninety cents. We're short our hope stocks. When you take risk in hope stocks and you get paid, then you take more risk, and you take more risk and there's no correction. So there's a very tough period

for our short book. Luckily, our long book we're not low as I said before, we're not low price to book low price sales. Investors were cash flow oriented investors, and people get very optimistic about our cash flows and our businesses when things are going well. So our longs were able to keep pace with our shorts and even add three points a year to the UH to that and we so the plus long did better than the plus short and you still have the underlying SMP correct.

So it's as index plus. But the great news is is that spread, that long short spread actually does better in bad markets. Well, that was my next questions with the words out of my mouth. If we would exceed, forget even another oh two thousand to oh two or eight oh nine, But I'm trying to think of a comparable. I was gonna say seventy three, seventy four, if that's not all that different from eight o nine. But if we see a run of the mill twenty correction that

last eight months, how would you expect this to perform? Well, those are our best markets for our spread. So obviously the index portion wouldn't do all that well, but you would want we viewed as an index and your own protection, you know, the words for that portion of your portfolio. Want to be sixty net long if that's where your risk tolerance is. What's the smartest way to take that percent long allocations of the market of that forty or fifties sixty and so what we like about index plus

it's really like owning the index with protection attached. Because you take high price cashing companies out our companies selling it a hundred times pretext FreeCast flow or fifty times, they're gonna take those guys out and shoot them. In bad markets, these are hope stocks. Those are gonna get crushed. Tesla, Netflix going down the whole, All those guys are gonna

get crushed. You know. Uh, it turns out, you know, through all our research and everybody else, is that buying things that a hundred times earnings or things that are losing money is pretty much the world's worst strategy over time. And so in bad markets even worse than that, Uh, those stocks will get crushed. We're buying stocks that are have huge cash flows. People have low expectations for them. That's why we're getting them so cheap, and so we

don't pay for high expectations in the long book. So when the lower bad news comes in, we didn't pay for high expectations. So our long stend to hold up better. Our shorts are getting killed. Great spreads and bad markets. And and let me just tell you where I think the market is. We value We have a big research team, and we value all the companies in the SMP five hundred. We also value the top roughly three thousand companies. But we value the these stocks in the SP five hundred.

Every day for the last twenty eight years bottoms up, so I can contextualize where do we stand today relative to those twenty eight years, And right now we stand in the sixteenth percentile towards expensive over those twenty eight years, meaning the market has been cheaper percent of the time for the SNP and cheaper six percent of the time. Then I can go back and look at what's happened

more expensive sixteen percent at the time. It's more expensive sixteen percent at the time, cheaper four percent at the time. My apologies, So it's expensive, and we can go back in time and look at what's happened to the market over the next few years from this valuation level in the past. It's not a prediction, it's just saying what's

happened from this valuation level in the past. And the answer to that is year forward returns of average three to five two year forward's eight to ten not negative because the market average nine to ten percent returns during those twenty eight years, and that's something we've come to get used to. It not necessarily will continue in the future, but that's what we've come to get used to. And

we're more expensive than that. So from the sixteenth percent to I'll expected returns about three to five percent eight to ten over the next two years. So if we get closer to what we're thinking over the next year three to five. And when we tested this over the seventeen years before we went live, we were able to add about seven points to that. So if we can add anywhere close to that and the market is only earning three to five, people really going to enjoy those

extra turns at that time. Our best returns are actually in not up three to five pc, which is very good returns above average returns, but negative returns. We had double digit spreads in all the four years that we looked at that the market in our tests that the market was down, uh, and that will be very precious to have not lose money. So you on the index plus protection. It's a more painless way to UH be long long the market, and we think people will stick

with us because it's UH. The underperformance periods we'll be way mitigated based on the way we're doing it. And we're already long a dollar in the market and you're only owning companies that are within the SMB five hundreds. So my assumption is you can scale this pretty easily right. Well, not only that, but we also don't buy big positions and small pieces of the SMP five hundreds. So we're not worried about capacity here. We're just worried about getting

high returns for investors. That that is quite fascinating. I very vividly remember this book coming out in something like that and and exploding like it came out of left field. I don't think a lot of the investing public, um necessarily knew who you were, and suddenly this book was everywhere. Um, what motivated you to write this twenty years ago, twenty plus years ago? I can't really explain why, But I love investing and I always wanted to write and teach,

and investing is what I know about. So I teach investing. I've been doing that at Columbia for twenty two years and always wanted to write about it. And so you can be a stock market genius. See. I can't even think of the name because it was such a bad name, but uh, it was a great marketing name. You may not love the name because it doesn't really describe the contents of the book that well, but it's certainly caught

people's attention. Well, it was really supposed to be any fool can be a stock market Genius, but only fools came out with a book. Uh, and so I had about twenty four hours to change the name, and I was canvassing my family and my father said something like, how about you can be a stock market genius? And then in parentheses, even if You're not too smart? And I kind of giggled about it, and uh, and we put that in it. It turned out to be one of the worst titles ever on the that the parentheses

even if You're not too smart is part of that. Yeah. So but I just really it was really a collection of war stories from you know, we had talked about we had run outside money for ten years or in fifty before fees for that period, and uh, how do we do that? And you know, how can you do that? And what what what are the what's the way you go about attacking that? And I just had a fun time writing about the war stories and having a good time with it. So let's talk a little bit about

some of those war stories. First, how old does the book hold up twenty years later? Well, I have five kids and made all my kids read it number one and uh, so I still think it's uh, everything in there is very valid, you know, any hedge fund managers. I did not write it for hedge fund managers. That's really who took two with the most, which is had to be an interesting surprise. Yeah. I really wrote it to be friendly and funny and and you know, just have a good time doing it. And I thought I

was writing to an audience of average people. But you know, I hadn't started teaching Columbia yet, and I realized as soon as I taught my first class back in that I think I really wrote this uh at an NBA level, because it was about at their level, and that wasn't my uh my goal. But you know, now lots of these big catch funds handed out first day when someone

walks in and says, go read this. So let's talk a little bit about spinoffs, which was such an important part in the first Let's call a third of the book ninety. The twenty years or more that preceded this a lot of them and a lot of conglomerates being formed. Would make sense that the next year that follows it sees a lot of spin offs. Um. But since since the book came out, we've seen certainly in the past

decade or so, less and less spinoffs. Do you think that part of the analysis still holds true or is this just like everything else? No, No, there are there are plenty of spinoffs and it's in here uh now, And people have done studies up through last year that showed that they did much better than the market as a whole, But that wasn't really my point. My point is is that the nature of spinoffs is, uh, they're

not underwritten written securities. They're usually given to people who don't want them, right, and uh, there's an interesting behavioral element that you describe, and nine is long before behavioral finance was everywhere, which is I expect people to get this and say, this is not why I bought X y Z. I certainly didn't buy it for the ABC spinoff. So there's a tendency for a lot of people to

not even analyze it, sell it. And suddenly there's a good cheap property there, right, So it may be cheap, it may not be cheap. They're not usually well followed, so there I would call it miss price. It's ripe for miss pricing. It doesn't really all the studies that show the average spinoff does this or outperforms or doesn't outperform, doesn't matter. What I was really trying to show people is places to look where things may be miss priced.

And here where people have never followed this company before. It's not being sold by an investment firm, given to people who don't really want it. It's ripe for miss pricing. It could be under priced, could be overpriced, doesn't matter which one it's. Uh. You know I I described in the book that it's you know, no fun to take a shovel and dig holes, but if you're digging, digging

for buried treasure gets more interesting. And so this is an area where has a big red X on it where there could be a nice treasure underneath if you dig here. So it's worth doing the work uh in these areas, so right for miss pricing is what I'd say. It doesn't really matter how the average spinoff does. However,

they have done very well. There are some things, as you mentioned, uh, built into the system that make people uh get rid of them uh, and and there are a lot of other areas in the market that does that. But the idea beyond the whole book was sort of look where you know, I started off with my in laws. The first chapter was about my in laws who uh used to shop in Connecticut for antiques and yard sales and and and country auctions and and things like that.

Artwork you mentioned artwork and sculptures and all these things. And they're looking off the beaten path. They're not looking in Manhattan on Madison Avenue or you know, Fifth Avenue. They're they're really looking off the beaten path, trying to find things that are undiscovered. But I made the point of saying, they're not looking for the next Picasso. They're not finding a painting in some yard sales saying, hey, this guy is gonna be the next Picasso. Uh, that's

really hard to do. What they're really looking for is a painting that they found the same artist had had on a painting that's of the similar idea that just went up for auction for three times the price it's being offered for over at South BEA's. So they they recognize that, uh, right now, a similar painting just went for three times as much. That's a lot easier to do than to project or predict the next Picasso. And so that's what they were doing. That's what you're doing

the spinoff area. You're looking and plate your your bargain comes because you're looking a little harder than other people. You're looking at things that are a little harder to do, a little harder to find, probably smaller than most people are willing to look at. Not the main idea. Usually these are discarded things, and these are all things that are right for miss pricing makes a lot of sense in the book there there's something that correct me up.

You right, never trust anyone over thirty and never trust anyone thirty and under. Essentially, never trust anyone. Tell us a little bit about your thought process with that. Well, when both of us were growing up, that was a saying, never trust anyone over thirty. I think anyone who's younger than we are probably doesn't even know that expression. So from them, Yeah, back in the sixties when we were

growing up, that's what you were. You know, don't trust the man, you know, anyone over thirty and and Uh, that was just my way of saying that you have to be your own boss. You have to look out for your caveat emp to war. In the investment world, like everywhere else, Uh, most people are trying to sell you things, they have an angle. It's very hard for you to discern who is or who isn't on your side unless you do the work yourself and know what

you're doing. And so it's very important to know that. And that's uh. You know. I gave a talk at Google number of months back, and I started it this way. I said, even Warren Buffett says that most people should just index. And I started the talk saying I agree with him. Then I left. I didn't actually leave if I said, but then again, Warren Buffett doesn't mean index, and neither do I. How come? And I explain the real opportunity set that's still out there. You know, I

get um, you know, is this still any good? Does this stuff still work? I get a you know, I get a hand raised in my classic Columbia every year, at least for the last five six years, a student will raise their hand and sort of say, hey, Joel, congratulations on a nice thirty five or thirty seven year career. But isn't the party over for us? There's more computers, ability to crunch numbers, hedge fund smart people doing this stuff.

You know, are we gonna have the same chances that that you had and so my students are second year NBA is roughly twenty seven years old on average. So I tell this is why I answer. I say, I'll tell you what. Why don't we just go back to when you guys learned how to read. Let's take a look at the most followed market in the world. That would be the United States. Let's look at the most followed stocks within the most followed market in the world.

Those would be the SNP five hundred stocks. And let's take a look at what's happened to the SNP five hundred since you guys, you know, learned how to read.

So I take them back twenty years when they were seven years old, and I say from to two thousand the S and P five hundred doubled from two thousand to two thousand two, halved from two thousand two to two thousand seven, it doubled from two thousand seven to two thousand nine and a half, and from two thousand nine to today it's roughly tripled, which is which is my way of telling them that people are still crazy.

And uh, it's way understating the case. Because the SNP five hundreds and average of five hundred companies if you lift up the covers and look at the dispersion going on between those five hundred companies between which are in favor at any particular time, in which are out of favor, the price movements are uh much wilder than what the average of five hundred companies doubling and having doubling and

having that doesn't even begin to tell the story. So if you drew a horizontal line uh and called that fair value, like Ben Graham said, and then you draw a wavy line around that horizontal line, uh and call that stock prices, the market is pitching us opportunities all the time between stocks that are way below fair value and way above fair value. The reason investors don't beat the market has nothing to do with the market is not throwing us pitches, and that it's not still emotional.

Their behavioral problem, there's agency problems, there's a lot of other issues going on, But it's not because we're not getting really great pictures all the time. People are still emotional. If you're cold and calculating, And go back to what we talked about in the beginning, where stocks our ownership shares of businesses and you're just cold and calculating, about what they're worth. You can really take advantage of the market.

I actually, uh try to explain this concept. A friend of mine who's an orthopedic surgeon, asked me to speak to a group of his uh buddies, you know, at a at a big dinner that he was hosting for orthopedic surgeons. He said, talk about the stock market for in half an hour, try to explain it, and then take Q and A. So I talked for half an hour. I started taking Q and A, and when I was done, the questions were something like, hey, oil went up two

dollars yesterday, should I buy some? Or market was down one percent yesterday? Should I get out? And my conclusion from that talk was that I had just crashed and burned and I had not really uh really gotten through to these very learned doctors. And then a notoriously difficult group to teach anything about because they believed themselves experts and everything. Well, I was asked to teach a much

easier group. This was a group of ninth graders from Harlem. Uh. It was a couple of years ago, and it was just for one day a week, for an hour a week, come in and teach them about the stock market. And this was right after I crashed and burned with the very learned, educated doctors, and I didn't want to fail with the kids. But as you're saying, I had fresh opportunity, blue sky with them, you know anything about the stock market. So I really thought long and hard about how is

it gonna explain the stock market to them? And so the first day of class, I brought in a big one of those old time jars filled with jelly beans, you know, big glass jar filled with jelly beans, and I passed out three by five cards and I passed the jelly bean jar around and I told them to count the rows and do whatever they had to do, but write down how many jelly beans they thought were in the jar. And I went around the classroom and

collected the three by five cards. Then I said, I'm going to go around the room one more time and ask you, in front of everybody else, how many jelly beans you think are in the jar. And you can keep your guests from your three by five cards. You can change your guests, that's completely up to you. And one by one I went around the room and I asked each uh student how many jelly beans they thought were in the jar, and I wrote that answer down. So let me tell you the results of the experiment.

The average for the three by five cards. You know, the first guests was one jelly beans. That's what at average too, And they were actually seventeen hundred seventy six jelly beans in the jar, so that that was pretty good. And when I went around the room one by one asking couple aged person publicly how many jelly beans they thought, that average guests was eight fifty jelly beans. And I explained to the kids that the second guest was actually

the stock market. And what I was going to teach them to do is be the first guests, be cold and calculating, count the roads, be very disciplined and valuing the businesses, not influenced by everyone else around them. When the second guess what happened, Well, everyone heard what everyone else was saying. And in the stock market, everyone read

the newspapers, they talked to their buddies. They see what everyone's saying and doing and reading and seeing the results in the news every day, and they're influenced by everything around and they're not being cold and calculating and disciplined. And so I was going to teach them how to be cold and disciplined, and that's what we try to do where we have a very discipline process to value businesses. And that's what I was teaching them to do, and

that's what stocks our ownership shares of businesses. And all the noise, nine percent of the noise you're reading the paper every day, excluding this podcast, is really noise. And uh so that's you know, that lesson really resonated, I think, and I did much better than the doctors. I would have guessed from the beginning you would have done better with the kids. I'm a big fan of Sturgeon's law,

which is everything is junk. And when you talk about filtering out the noise and trying to get to the signal, hey, the same thing is true across all sorts of different um venues. That that noise in the public is just it's astonishing and I'm I'm fascinated by that having people do it publicly and how that leads to such a different result, especially when they came so close on average when they were were private. Let's talk a little bit

about one of your later books, The Magic Formula. How did you how did you make this transition from what looks like special situations investing to really quantitative investing. Sure, well, I'm glad you brought it up that way. So I wrote a book called The Little Book that Beats the Market, and we don't think of ourselves as quantitative investors, although in The Little Book that Beats the Market, we use some simple quantitative methods to show people concepts of Ben

Graham said buy it cheap. His best students a guy named Warren Buffett, who said, if I can buy a good business cheap, even better, and that made him one of the richest people and the people in the world. And we have used that philosophy. That's what I teach a Columbia. That's what we've used to make money over the last thirty seven years, buying good and cheap businesses.

And wanted to share that with everyone else. And so we ran a statistical test just to show that just using crude metrics for cheap and crewd crude metrics for good and crude metrics for and crude database that we could do very well. And so that's what we showed in the Magic Formula. And we said the magic formula only really has two parts. Cheap. Uh, and for cheap. We really rank companies based on a simple metric that was earnings before interest in taxes to enterprise value. And

I usually describe that as rent. So in other words, uh, you're buying a house and they're asking a million dollars, and your job is to figure out whether that's a good deal or not. So there are fairly simple questions you'd ask, uh if you're trying to figure that out. One would be if I rented out this house, how much could I get for it after my expenses on capital? No, So return on capital would be how the business invests

its own money. It's really as the investor, what price do I have to pay for the house and how much is it gonna earn me? So it's as an investor, it's my return on capital. But I don't want to confuse that with how the business itself invest its money, which is really how I look at return on capital. So there's uh so it's really a return on investment. Okay, I'm laying out a million dollars getting eighty thousand dollars

a year in rent. That might be eight percent net of my expenses, and interest rates are two or three percent That may look pretty attractive. There are other questions you'd probably ask, you know, if we were really doing this analysis, you'd probably say, hey, what are the other houses on the block going for, in the block next door, in the town next door? How relatively cheap is this? And we do the same thing. We say, how cheap is this business relative to similar companies? How cheap is

it relative to all companies? How cheap is it relative to history? That's what we do at Gotham. But for the purposes of the little book that beats the market, we just did cheap on a free cash flow basis, just like how much rent? But and it's a very simple metric. And then we said, you know, I described this a little bit earlier. We talked about it is I was trying to describe I wrote this book for my kids, and I said, how do you describe how

good the business is? And if you read through Buffet's letters, it's very clear that he's looking for businesses that are in high returns on tangible capital. And I described that is every business needs working capital, every business needs fixed assets. How well does it convert its working capital fixed assets into earnings? So I said, if you're building a store. You have to buy the land, you have to build the store, you have to set up the displays, you

have to stock it with inventory. And if all that cost your four hundred thousand dollars and the store earns you two hundred thousand dollars a year, that's a fifty percent return untangible capital. And I compared that to a store I called in the book, uh, just broccoli, and which is not going to return a lot, and they're just broccoli. Is selling just broccoli in your store is probably not a good idea. I never tried it, but

it's probably not a good idea. But you still have to buy the land, build the store, set of the display, stocked with inventory, still going to cost you roughly the same four hundred thousand dollars. But because it's a dumb idea, maybe it only earns ten thousand dollars a year. That's a two and a half percent return on tangible capital.

And all I said in the book was, all things being equal, if I can get the same price, I'd much prefer to own the business that can reinvest its money in fifty percent returns, then two and a half percent turns, and so What I did for the book's purposes is something very crude. I ranked all companies based on how cheap they were, and then I took another ranking of how good they were, what kind of returns

on tangible capital they were getting. Then I combined those two ranks and bought the best combination of cheap and good. And I showed how well that works. It worked so well just using these crude metrics that the top ten percent combined score for cheap and good did better than the second ten percent, better than the third ten percent, in order all the way down to the bottom ten percent, just showing you the power of how this cheap and

good work so well. And if I'm getting these numbers right, from to two thousand and four, this portfolio would have returned about thirty percent a year. Well, at the same time, the market would have given you a little over twelve percent. Is that about right? Yes, So that was with small cap stocks, which unless you're an individual investor, would be hard to take advantage of um as a instant sational investor.

But I also did a similar study for the thousand largest companies, you know, the Russell one thousand companies, and you know which are very similar to the S and P five and that that was versus about twelve still also pretty good. Yeah, I'll take it. Uh, possibly a little more realistic for UM large investors. We have been speaking with Joel Greenblatt. He is the c i O of Gotham Asset Management. Be sure and check out the podcast extras where we keep the tape rolling and continue

discussing all things value and index Plus. You can find that at iTunes, Overcast, SoundCloud, Bloomberg, wherever your final podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my daily column on Bloomberg View dot com. Follow me on Twitter at rid Holts. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Joel. Thank you so much for

doing this. I've been looking forward to this for a long time. You and I have never met, never really spoken before, but I've been very much aware of who you are and what you've done over the years, and UM, I have to tell you some of the numbers that you have put up, and I know there's only so much we can talk about them. Um, are just astonishing. We talked about the fifty a year before fees for ten years. That's an amazing run. Like Renaissance technology, that

returned capital to investors. I have to imagine people were not especially happy when after ten years of those sort of returns you said, here, I have to give you this back. What was motivating it was its strictly scale or was there were there other factors that said, um, I'm done managing other people's money at that At that point in time, you know, Uh, that's a great question. I thought about that a lot. I love investing. Never was going to quit. We had gotten to a size.

I suppose after ten years of having nice returns that we could keep our staff and continue to run our internal money. And for me, it's just fun to do. Uh. Did you think that at that size you couldn't continue generating those sorts of returns? Well? I think, Uh, you know I left out You had asked me how we did fifty percent a year, and you know one was I said we stayed small. Two we were concentrated, and

three really we got lucky. Okay, that you have to have some luck to get those kind of returns during uh that period of time, and and so I one of the most fortunate people on the planet. I have a large family with five kids. I love doing this. Uh, I like to do really well. So there's pressure I put in myself when I'm running other people's money. Maybe I have a little less so and I'm not running it.

So I don't think it was really a calculated plan other than you know, how can I continue to enjoy what I'm doing in in the best way and still get to do what I like and still work with the people I like to do. And so it seemed like the right thing to do at the time. I guess it's the best way I can. That make sense. And it took almost twenty years before you started. It's really a fourteen years fourteen years before you said it took that long to forget the stress of running other

people's money. Well, you know, when you own six or eight names, one of the issues there is that, uh, every two three years, pretty much like clockwork, I'd wake up and um, it was of my net worth in a couple of days because one or two things weren't going our way, either we were wrong or just you know, they went the wrong way for a little while we knew what we owned we were gonna get paid back, and that's a little more stressful. And it had to

happen when you're that concentrated. That has to happen a little more stressful with other people's money. Uh, since I know what we owned, and A I'm a big boy, so I want to make a mistake, you know, I just chalk it up to a learning experience and move on. Uh let's just say I think my investors were great, but maybe they wouldn't be so kind when that that that uh happened and it and it did seem to happen every two three years, and I think that's unavoidable.

So when we developed the strategy to take advantage of our principles meaning buying good, cheap businesses and shorting expensive ones that uh that we're trading way above what we thought they were worth. When we discovered that we can actually make more money having diversified portfolios, and that our bad days would be twenty or thirty basis points of underperformance,

not down. Uh, that was a it wouldn't degrade our own returns taking other money When we had hundreds of stocks on the long and short side, and b it wouldn't hurt our own returns because more diversity helped our returns. Because when you don't get what you expect, mean, you get aberrationally bad returns. Uh. Sometimes that ends up in negative compounding. So when you have hundreds of stocks, more diversity on each side, you get less aberrationally bad returns.

It's why insurance companies don't insure five people because even if you do great underwriting of those five people, if someone steps off a curb, you can tell I don't sell insurance. But if some instepts of a curb and ruins all your numbers, you know, Uh, it didn't matter what kind of underwriting you did, that's a life insurance or helping. Yeah. So if you can be right, you know, they want to be right on average, so they're gonna

be right over hundreds or thousands of people. And so when we realize that we could make more money being more diversified, when you go long short and put on leverage, you want that. Uh. It didn't hurt us to take outside money because diversity was good for us. Uh. And you know, to to cover so many needs, we need a big research team so we build up our research team and our tech team. They help us trade you know, we're uh, we're you know tech team. One guy we

have you know as m I T chess Champ. Another guy was one Google code jam you know at people and other guys you know, as smart than as smarter than nogat those guys. So I get to work with the tech team and they help us trade efficiently. They help us, uh, trade tax efficiently, so we're very very tax efficient, help us put together the systems where our fundamental analysts can cover broad range. So it's been fun

building a team to do all these different things. So I'd say we're fundamentally we we fundamentally value businesses, but our tech team helps us put together risk adjusted portfolios very well and trade efficiently and be tax efficient all those things. And just building this whole thing has, you know, doing something with the same principles that we've always used has been really just fun. Tell us the most important thing people don't know about your background? Oh well, I

don't know what they don't know. I've written three books, and I always tell personal stories within the books, so I think I've included lots of embarrassing things I, Uh, I don't think I've ever written that I enjoyed playing tennis. I did write that I enjoy sailing and that I'm not very good at it, and I've been in a bunch of close calls with that. But uh, that's probably how I spend most of my leisure time as well as along with my family. So there's nothing really too fascinating.

Tell tell us about some of your early mentors. Well, you know, one of the reasons I write books is because my mentors really came from reading people who were kind enough to share with me, uh their wisdom over time.

And that's you know, people like Andrew Tobias and uh and Benjamin Graham and even Buffett in his letters and uh, David Dreaming, you know, uh who wrote Contrarian Investment Strategy, and John Train who out the Money Masters, and all these people really were helpful informing and getting me involved in investing. And you know, I wanted to share some of the things that I learned too, because that's how

I learned. Dude, really wasn't so much. Uh, you know, some of the people were dead and they were still sharing with me, and and some of the people who just kind to do so, and I, you know, one of my ways, you know, besides the fact that I enjoy writing, it was another way that I felt I could get back. So let's let's talk about some books. What what are some of your favorite books? You've already mentioned the two from Graham Intelligent Investor and Security Analysis.

What other books did you find um influential, be they finance, nonfinance, fiction nonfiction? What what really stayed with you? You mentioned David Dremmond on Contrarian Strategies. That's a interesting book. Yeah. Well, there's a book called The Invisible Heart, which explains basic economics to most people, and most people today, you know, especially young people are kind of more socialists, isn't that isn't the old line, um, socialists uh in your youth

and capitalists in your older age. I know I'm mangling that. Yes, no, I I know the reference, and that's partially true. It's just discouraging, uh to me that the the understanding basic economics is kind of necessary. And so there's a book that's a fiction book, uh um uh. Russ Roberts wrote it called The Invisible Heart. Not how many people have read it, but it's a very short book that I think most people should read. So I would read that. I've had my kids read that. Um Russ Roberts also

maintains a blog. Is it's the same one? Yes? And did he does he do? Um? Actually Econ Talker or something like that. He probably does. Haven't followed that. It is a book about economics. It's a fictionalized book about a high school economics teacher. But it's just a pleasant, short book way to to learn basic principles. Uh. So I'd highly recommend that even if you don't want to be in a you know, no formulas, just you want to be an econ, you want to understand basic economic principles.

I think that's one of the best that people haven't seen. I think for investing, Moneyball was one of the great if you live, if you're a sports fan at all, just understanding how to buy undervalued players is is very similar to buying undervalued stocks. Uh And so that's a really helpful book for most people. I just read a book called The Power of Moments, which I really enjoyed, which says that most of your uh seminal moments in your life really come between the ages of fifteen and

thirty because you have a lot of first uh. You know, it's the first time you graduate and leave home. Might be your first girlfriend. Uh, you're graduating college, You're getting your first job, you might be getting married, you might have kids. All happens in that kind of compact period for most people, and people think back for the rest of their life about those seminal moments. And it's really about a book about creating your own moments. In other words,

those happen because those are natural. First, those those happen naturally because of evolution. But can't you create those kind of important moments in your life? And that really comes down to creating, doing new things, always creating. You have to be a little more creative when you get older to create those new things. But those are the things you think about, uh, which I think are quite important. I'm also reading another book now which I think I'm having a lot of fun with which uh is uh.

I think it's called Never Split the Difference, and it's by uh the ex chief hostage negotiator for the FBI, you know, just about negotiating and also thinking of uh, you know, how you can apply some of these concepts to business, you know, to be be effective. So enjoyed that. Uh, you know, everyone has to read news interested in investing, intelligent investor. You know, I think it's chapters eight and twe Buffett always points out, and I agree with that.

I think Buffett wrote a bunch of letters that were compiled by Lawrence Cunningham. Uh, that into topics and that was laid out, and I always assigned that in my class, which I just think is a great, great book. And you've mentioned my three books three times, and so you have to read those two tell us about a time

you failed and what you learned from the experience. I'll talk about my worst investment, not specifically what it was, but but it was an investment in a trade show company that I bought through It was really I created through a spinoff, and I was shorted one thing and bought another. And I actually paid three dollars for something that I was immediately going to get six dollars for.

But I fell in love with the business and it actually ended up did I paid three dollars for to eventually in short order went past way past the six dollars because I loved the business. It went to twelve dollars a share, which was pretty good. But I had a very large position in it at that time. And what I loved about the busines this was they ran a computer trade show called Comdex in UH in Las Vegas. And I love the business because plenty of space in

Las Vegas. If they got more clients to display at their trade show, UH, they could just rent more space for two dollars and resell it for sixty two dollars. They didn't have to commit it, so that it was like a sixty dollar contribution for every uh incremental sale they could make. And that's generally called operating leverage. And that's what I loved about the business. And I think

people are very familiar with financial leverage. Right if you put up a dollar and buy borrow nine dollars and buy something worth ten dollars, you realize that if that ten dollar thing you bought falls a dollar or two, you're gonna go broke. And everyone understands that that's very straightforward. UH. So this was my lesson in operating leverage. You know. Unfortunately, after nine eleven, right before nine eleven, the trade show

bought another trade show. They brought a lot of money to buy it, and then nine eleven happened and people didn't want to travel. And so I learned a lesson in operating leverage, where when you don't get that sixty two dollars in it and it only cost you two dollars, Uh, sixty dollars of less earnings dropped straight to the bottom

line as well. Uh. And that's called operating leverage. And I just thought i'd described that to you so that people would realize that on the way up, just like financial leverage, it's a lot of fun, and on the way down, operating leverage on the way down is not very much fun. So I got out of most of my stock at about a dollar, So I'll just leave it at that and say that's a less of my investment.

Lesson in operating leverage at least be aware um our last two questions, Uh, what sort of advice would you give a millennial or recent college graduate who told you, Hey, I'm interested in going into financials as a career. Well, you know, I I've taught Columbia, as I mentioned, for the last twenty two years, and so I tell my students that first had class. Actually I tell them that, you know, I don't think there's a lot of social

value in being a investment manager. Uh it's not that I don't think, Uh, investors who do work help set prices and allocate capital and all those things. But I just think, ay, they're not very good at it, and be it would all get done without you and smart people doing this too much horsepowered rather than them go into other fields. I have loved being in this field.

I enjoy it and there's nothing wrong with it. But what I tell my students is I'm even one step removed from doing something I don't think is that socially valuable because I'm teaching you how to do something this, you know, So what am I doing here? And so what I make my students promise, and I think they take to it well, is that if I do teach them and I am helpful in in in learning how to do this, and they enjoy it, there's nothing wrong

with it. It's a great thing. But they should think of a way to give back they you know, we get way overpaid in this businesses we're successful, and if they're successful with what I teach them, and I would say that any young person, if they're successful in this field, I think they should really think of different ways that they're clearly smart people, they're clearly uh driven people, they're they're thoughtful, and so they should be able to think of a way to give back and use those skills

for that. And so that that's what I tell young people who want to go into the investment business. And our final question, what is it that you know about investing today that you wish you knew thirty seven years ago when you were first started. I would say probably

the secret to being successful is patients. The big secret that no one bought him and as well tell everyone is really just having a longer time horizon than most people and understanding what you're doing, meaning you're buying businesses and if you're good at valuing them. I actually make a promise to my students first day of class every year. I promised them, if they do good valuation work, the market will agree with them. I just never tell them when.

It could be a couple of weeks, could be two or three years. But if they do good work, the market will agree with them. And to keep that in mind to continue to do good work and have patience. And you know, since you can check your stock price thirty times a minute, now, I think you know we used to get when I was, you know, coming into the business, used to get a quarterly statement and throw it right in the garbage. You know, you didn't really

care that much. Now your minute a minute. You know, even our best investors, you know, billion dollar UH endowments, expect weekly returns from us in our private funds. I have no idea what they do with that information, but that's what they're asking for. And everyone's judged on very short time horizons. So if you can step back and take a longer time horizon, that is the big secret that I could share. And the sooner you learned that, and the sooner I learned that, the better off that

they and and I will will be. We have been speaking with Joel Greenblatt, CO c i O of Gotham Asset Management. If you enjoy this conversation, be sure and look up an Inch or down an Inch on Apple iTunes, Bloomberg Overcast, and you could see any of the other two hundred such podcasts we've done previously. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank the Crack staff that helps us put

this podcast together each week. Caroline is my engineer today, Medina Parwana is our producer. Taylor Riggs is our booker. Mike Batnick is our head of research. I'm Barry Retolts. You've been listening to Masters in Business on Bloomberg Radio.