Greenblatt: Stay Disciplined, Think Long Term

Find a strategy you understand in and believe in, and stick with it — it sounds simple, but many investors fail to do that. And, according to hedge fund guru Joel Greenblatt, it’s key to beating the market over the long haul.

“You have to understand what’s being done,” Greenblatt tells Forbes. “That’s the hope, that between all my writing and talking and everything, that people will actually understand what they’re doing. And not get freaked out if there’s some period of underperformance. That’s just part of the deal.”

The key, he says, is being able to think long term and go against the short-term-obsessed crowd — and to realize that short-term periods of underperformance are inevitable, no matter how good an investor you are. “The world has become more and more institutionalized and short-term focused,” he says. “If you actually have a long time horizon, you can beat the big guys, because they are forced to take a very short term approach to things. … The idea is to understand the principles behind what you’re doing so that you can stick with them when they’re not working.”

Greenblatt says that his approach has beaten the S&P 500 by 600 to 700 basis points a year over the last two decades, “with the same volatility and the same beta and more diversity. … Academics would say, ‘Well, you can’t really do that.’ [But] I think by constantly and continuously re-balancing towards the cheapest things you can find, you can easily do that.”