Supported by Greenhaven Road Capital, finding value off the beaten path.
I can’t believe I read a book titled You Can be a Stock Market Genius. Normally I’d walk – or scroll – past it. If it even registered I’d think, vanity project or survivor bias. Of course, I’m writing this, so this appears to be a rare and unexpected extreme case (a black swan) where I am wrong.
Joel Greenblatt’s book was good. What I liked most was that Greenblatt talked through big ideas (which we’ll get to below) and walked through situations when he applied those ideas. It was never, ‘I have the golden touch.’ Greenblatt, like Phil Knight in his book Shoe Dog shared humble and honest reflections. Both fund manager and retail founder admitted to a mix of luck and skil (the two-jar model ).
Okay, this isn’t a confessional. Let’s get to it:
How to invest like Joel Greenblatt
Step 1: Be different.
Your edge, Greenblatt writes, comes from taking “knowledge and applying it in places off the beaten path.” You need to be able and willing to look in places other people don’t. Two ways stood out:
- Difference in deadlines. “Time and interest are your only constraints,” writes Greenblatt.
- Difference in size. Greenblatt has a friend named “Bob” who lacks your flexibility. Bob’s strategy is “imposed on him by the dollar size of his portfolio, legal issues, and fiduciary considerations.” You can be different when Bob must be the same.
Just be different. Easy peasy.
Being different is hard. “Everyone can’t be a contrarian,” Greenblatt writes. You have to, in Howard Marks‘s words, be different and be right.
Only recently I watched The Big Short. While only once have I enjoyed a movie more than a book, The Big Short showed the emotions in a way I didn’t remember. Michael Burry’s investors wanted out. I thought Mark Baum might kill himself (or someone else). Charlie Geller and Jamie Shipley had everything they owned on the line.
Being different and right is interesting to read (and write) about, but doing it is so much harder.
Look at Harry’s. It’s a good business. Selling razors over the internet is different, but is it right? Maybe. There’s nothing proprietary and Amazon is making more private label goods. “You have to find a niche and differentiate on some dimension. You can’t hope to out Amazon Amazon,” said Harry’s founder Andy Katz-Mayfield. Will he do that? Time will tell.
Sam Adams did much the same thing said founder Jim Koch. His story is great, but do you know how big Sam Adams is? Koch said the big beer makers spill more beer than he makes in a year. Even being different and being right doesn’t mean you’ll be big.
Step 2: Beware of GEEKS bearing gifts.
“Investors must never forget,” writes Seth Klarman, “Wall Street has a strong bullish bias.” Greenblatt has the same idea. You can, and should, listen, read, and pay attention to what is going on but you must “do your own work.” Mohnish Pabrai said this too.
Step 3: Pick your spots.
My college roommate liked to play blackjack. He’d drive an hour to Windsor Canada to play. He tried to convince me to go (presumably to split the cost of gas) by explaining why blackjack was the best game. It was the game, he said, with the best odds for the player and worst for the house.
I never took him up on this offer, but my friend was onto something.
In Bringing Down the House, Ben Mezrich wrote about the MIT card counting team that worked Vegas. Their strategy was to have one person play at a table and “count” the cards. Low cards were minus one, high cards were plus one. If the count trended high, the player at the table would signal to a partner to step up and make a series of large bets.
The card counters were picking their spots.
Greenblatt makes this point by recalling a time he was at Lutece. A great restaurant where no matter what he ordered it would be good. Remember, Greenblatt writes, quoting Benjamin Graham’s idea of Mr. Market, he will knock on your door today, and if you say ‘no’ he’ll be back again tomorrow.
Step 4: Margin of safety.
“Margin of safety should always top your investment list.” “If you don’t lose most of the other alternatives are good.” “Look down, not up.”
If it can go wrong, it will go wrong Mr. Murphy once said. Greenblatt once had an investment plunge because of a sinkhole. A sinkhole! “Risk of sinkhole,” Greenblatt writes, “was not one of my checklist items for determining whether or not to invest in a particular merger deal.”
Okay, okay, okay. I get it, but how much do I need?
“A margin of safety is achieved, writes Seth Klarman, “when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world.”
That doesn’t help much, does it?
The key is not paying too much, no matter how good the idea. Greenblatt writes, “I had no intention of buying my stock at the top end of the industry P/E range, justified or not.”
Margin of safety can be valuable in any investment. It’s having space, writes Greg Ip. It’s haveing low costs like Sarah Silverman. It’s allowing for the worst case scenario in street fights and island invasions.
That’s is all it takes to succeed as an investor.
- Be different.
- Listen to, read, and study others, but trust no one and do your own work.
- Pick your spots.
- Create a margin of safety.
Of course, your mileage may vary.
Oh, and one more thing.
You have to keep it simple. “If it’s too difficult I’d rather skip it,” Greenblatt writes. Let it go if it’s too hard, or for things that move too fast.
This applies to your gear too. The Wall Street Journal, an internet connection, and a library card “can do the trick.” Your local library probably has all three.
My mistakes are actually white swans; common, easy to see, non-fatal, and expected.