While he hasn’t changed his general value investing approach, hedge fund guru Joel Greenblatt has changed the way he implements that strategy. The reason? Many investors just can’t handle the ups and downs of a concentrated portfolio.
Greenblatt used to run a concentrated portfolio picked with his “magic formula”. But in an interview with Value Investor Insight, he notes that doing so meant that every two or three years “we could lose 20-30% of our net worth over a very short period of time.” Even though the strategy produced outstanding returns over the long term, many investors just couldn’t stick with it through the volatility.
Now, Greenblatt runs less concentrated portfolios of long and short positions. “His research team determines valuations for the 2000 largest US companies by market cap, and then lists them according to their current discount — number 1 has the highest discount, and number 2000 has the highest premium,” ValueWalk’s Michael Ide explains. “Using that list, and weighting positions according to the amount that each stock is discounted, Greenblatt creates the net position appropriate for each fund.”
“We’re still fundamental value investors and I expect very good long-term returns, but the ups and downs should be much less severe,” Greenblatt said. “That means people are more likely to stick with it, which should turn out far better for them in the long run.”
Validea’s Joel Greenblatt-inspired portfolio is up 10.7% annualized since its late 2005 inception vs. 4.7% for the S&P 500. Check out its holdings here.