Joel Greenblatt: “The Opportunities for Active Managers are Getting Better”
Joel Greenblatt serves as managing principal and co-chief investment officer of Gotham Asset Management, the successor to the advisory business of Gotham Capital, an investment firm he founded in 1985. Since 1996, he has been a professor on the adjunct faculty of Columbia Business School where he teaches "Value and Special Situation Investing." Mr. Greenblatt is a director of Pzena Investment Management, Inc., a global investment management firm. He formerly served on the investment boards of the University of Pennsylvania and the UJA Federation. Mr. Greenblatt is the author of You Can Be A Stock Market Genius (Simon & Schuster, 1997), The Little Book that Beats the Market (Wiley, 2005), The Little Book that Still Beats the Market (Wiley, 2010), and The Big Secret for the Small Investor (Random House, 2011). He is the former chairman of the board (1994-1995) of Alliant Techsystems, a NYSE-listed aerospace and defense contractor. He holds a BS (1979), summa cum laude, and an MBA (1980) from the Wharton School of the University of Pennsylvania.
The Gotham Index Plus Institutional Fund (GINDX) was introduced on March 31, 2015. GINDX is in the 1st percentile of its Morningstar peer group (Large Cap Blend) for the period since inception (March 31, 2015) through March 31, 2017, significantly outperforming the S&P 500. Its expense ratio is 1.15%.
You’ve been a value investor for over 35 years. Where are you seeing valuations today in the U.S. equity market?
We look at stocks on a bottoms-up basis, particularly the S&P 500, but even more broadly. If you just look at the S&P 500 stocks individually, and we’ve done that for the last 25 years, and valued them using our valuation methodology, we can actually contextualize where we stand today versus those 25 years. We stand in the 17th percentile of the most expensive valuations over those 25 years, which means the market has been cheaper 83% of the time and more expensive 17% of the time.
We can take a look at what’s happened over the next year or two from these valuation levels in the past. It’s not a prediction, but it is saying from similar valuation levels in the past what’s happened over the next year or two. What that says is, over the next year markets average 3% to 5% annualized returns, and over two years, 8% to 10% from these levels.
After a number of years of outperformance for growth, many industry experts are calling for the next decade to be the “decade for value.” Do you agree?
We don’t discern companies between growth and value. Our definition of value investing is to figure out what a business is worth and pay a lot less. It’s not low-price to book or low-price to sales. So neither Morningstar nor Russell, or services like that would classify us as value. As Warren Buffett would say, “value and growth are tied at the hip,” meaning part of the value of a business is its growth prospects discounted back to today.
We are looking at things like a private-equity firm would when they are deciding whether to buy a business or not. Those are much more cash-flow oriented. Making the distinction between traditional value and growth will lead us to the wrong conclusion. There is an opportunity – a nice opportunity – for value going forward. But that’s what investing is; it is buying things at reasonable valuations and making returns from there.