Supported by Greenhaven Road Capital, finding value off the beaten path.
Joel Greenblatt joined Barry Ritholtz for a strong seventy or so minutes. Even though I’ve read (but need to re-read) You Can Be A Stock Market Genius I still enjoyed this episode. On to the annotations!
A new Point of View. Greenblatt had an hmm, that’s interesting moment in college.
“Junior year I read an article about Ben Graham’s stock picking formula and ‘net-net’ seemed very simple to me. I was at Wharton at the time and we were learning about efficient market theory and none of it resonated with me.”
“What they were telling us at Wharton was, don’t try to figure things out, stock prices are efficient.”
“It was a good age, I was twenty-one at the time.”
Time and again we this advice; pay attention to the world and if you see something that doesn’t fit your worldview note it.
How do you get seven million dollars from Michael Milken? Luck.
“The simple story is that I had a friend at Wharton who was one of the people in Michael Milken’s group and I had been working at a hedge fund but had always wanted to go out on my own, felt I was ready, and mentioned it to my friend, and said if I could raise X dollars I would go out on my own and he called the next day and Mike said fine.”
And then how do you return 50% a year for ten years? That’s (partially) luck too.
“One, we stayed small (“One of the ways to get those kinds of returns is not to run a lot of money. After five years in the business we returned half our outside capital.”).”
“Two, we were concentrated (“And the other way is to be concentrated. Six to eight ideas were usually eighty-plus percent of our portfolio.”).”
“Three, we got lucky. You have to have some luck to get those returns.”
I agree with Michael Mauboussin‘s comments about luck; “There is no way to improve your luck because anything you can do to improve a result can reasonably be considered a skill.” But also with Scott Adams:
“I find it helpful to see the world as a slot machine that doesn’t ask you to put money in. All it asks is your time, focus, and energy to pull the handle over and over. A normal slot machine that requires money will bankrupt any player in the long run. But the machine that has rare yet certain payoffs, and asks for no money up front, is a guaranteed winner if you have what it takes to keep yanking until you get lucky.”
The manageable variables for a lucky outcome are persistence and time.
Capital Allocation. In Greenblatt’s The Little Book that Beats the Market, he introduces the Just Broccoli store. What I misunderstood when reading this book were the second order effects. I thought 8% >2% returns. While true, the real value comes from reinvestment.
“All things being equal it’s better to own the business that can reinvest its money at fifty percent returns than two-and-a-half percent returns.”
After the Moats and Allocator’s podcast, I now understand that better.
Jellybeans and noise. Greenblatt started his Google Talk pointing out that Warren Buffett advocates for indexing, “But Warren Buffett doesn’t index and I don’t either, how come?”
“People are still emotional,” Greenblatt demonstrated to a ninth-grade class with a jar of jelly beans. First, he had each student privately count, guess, multiply, and estimate any way they saw fit to figure out how many jelly beans were in the jar. They wrote their estimate on an index card.
Then, he opened up a dialogue in the room and each student shared their guess OR changed it based on what they heard. The index card average was much closer than the open floor guesses. Do your own work, be disciplined, Greenblatt told the class. “99.9% of what you read in the news each day is noise.”
Stakeholders. We call them stakeholders rather than shareholders to include anyone who is part of your life. Greenblatt returned investor’s money, in part, because he wanted fewer people to call him. A concentrated position, “like clockwork lost twenty percent of my net worth in two or three days.”
“My investors were great but maybe they wouldn’t be so kind when that happened and it did seem to happen every two or three years.” Today’s Gotham Capital Index Plus is a different arrangement, with different stakeholders, different rules, and different incentives.
“There’s a book called The Invisible Heart which explains basic economics…it’s a very short book that most people should read.”
“For investing, if you’re a sport’s fan Moneyball was one of the great ones…undervalued players are very similar to undervalued stocks.”
“I just read a book called The Power of Moments which I really enjoyed…it really comes down to doing new things.”
“I’m also having a lot of fun with Never Split the Difference.”
“Everyone who’s interested in investing needs to read The Intelligent Investor, especially chapters eight and twenty.”
“Buffet wrote a bunch of letters that were compiled by Lawrence Cunningham into topics and I always assign that in my class because I think it’s a great book (The Warren Buffett Shareholder: Stories from inside the Berkshire Hathaway Annual Meeting).”
Thanks for reading.