Greenblatt on Value, Time, and Discipline

In an interview with Barron’s, hedge fund guru and author Joel Greenblatt talks about how and why value-focused strategies tend to beat the market over the long haul, and where he’s currently finding opportunity in the market.

“The way we make money as a group is that we don’t pay a lot for anything, and most of the stocks we buy have low expectations,” Greenblatt explains. “So if the future is a little better or a lot better than the low expectations — it doesn’t have to be great — you have the chance for asymmetric returns on the upside. And, hopefully, you don’t lose much on the ones that don’t do better than the low expectations, because you didn’t pay much for them in the first place.”

Greenblatt stresses the importance of time and discipline for investors. With more and more funds and investors today, he says beating the market should be harder than ever. “But there is one area that has actually gotten even better over time: the long-term investing horizon,” he says. “What I tell my business-school students is that if you get your valuation work right, and if you wait two or three years, usually the market will agree with you. But what happens in the short term could be anything. The world has become more institutionalized, as performance numbers become available on a daily, weekly and monthly basis. And as more fiduciaries are involved in the investment business, the time horizon of investors, clients and the actual managers has gotten shorter.”

Greenblatt also says it’s important for investors to pick their spots if they’re going to try to evaluate individual companies, and focus on areas in which they have a lot of knowledge. That’s the opposite of what most professional investors do, he says.

The market, Greenblatt says, appears to currently be in the “zone of fair value”. His strategy is high on stocks in the consumer discretionary, financial, and healthcare sectors, and is underweight energy stocks.