6 Must-Know Investing Lessons from Joel Greenblatt
I've studied Joel Greenblatt's Columbia Class Notes and compiled 6 of the most important Takeaways here in just 3 minutes of reading time. A very good return on your time ;)
I publish a comprehensive Deep Dive for Paid Members on the first of every month. What Company should I do next?
1. Owner vs. Portfolio Manager
One value investing principle is to take the position of a business owner in your stock investments. That way, you won’t be influenced by noise so much and focus more on the underlying business than the pricing of the stock.
Portfolio managers are trying to combine the right pieces of paper (stocks) to fit them into their academic risk and return models. Investors with an owner mentality want to own good companies.
They don’t buy holdings for the sake of diversifying. They invest only when it makes economic sense.
Portfolio managers research stocks. Owners research businesses.
2. Management vs. Incentives
For 90% of investors, getting a genuine and honest picture of the management is impossible. Even if you had the opportunity to talk with them, they’re well-trained and confident enough to tell you whatever you want to hear.
But ignoring the management of the company is also a bad idea. In too many cases, they play a vital role in the success of the company. Generally, the smaller the company, the bigger the impact of the management.
So, instead of trying to talk to them, look at the incentive structure for the management.
Are they incentivized to add value to the company and shareholders? If so, they will. If not, they will care more about benefiting themselves.
3. It’s all about Valuation
Greenblatt emphasizes the importance of valuation over and over again. Do good valuation work, and you’ll make good investments.
And it’s obvious why. Everyone (well, at least many people...) gets the concept of buying a good business at a cheap price. But nobody will and can tell you what a cheap price is. You must find it out for yourself.
A big part of that is finding the context/story others cannot see and combining them with the facts given by the financials.
4. Leverage & Patience
Greenblatt, as well as many other successful investors, prefers owning a concentrated portfolio. There simply are not that many great opportunities. And you don’t want to settle for mediocre.
But if you own a concentrated portfolio, leverage is even more dangerous than when you own a diversified one. It’ll wipe you out in downturns. And those downturns ALWAYS occur sooner or later. No matter how great the environment looks
Have patience and trust in your decisions, then there’s no need for leverage.
5. What’s your limit?
Most investors fail to see their boundaries. There are so many stocks and “opportunities” thrown at you that it’s tempting to fall for them.
But what companies do you actually understand? For most of us, that will be a very limited amount. AI has a huge hype right now. Probably deserved.
But having used ChatGPT once or twice doesn’t turn you or me into an AI expert. And it’s very hard to assess the competitive advantage of Nvidia without understanding what exactly they do. (If you vote for them as the next Deep Dive, I’ll give my best ;) But if I can’t assess them properly, I must admit that!)
By the way, just because you don’t know something yet doesn’t mean you never will. I love writing Deep Dives because I always learn something new. But one has to be honest with one's own limitations.
6. What’s a good Business?
It’s always: “Buy a good business at a fair price.” But what is a good business? This is Greenblatt’s criteria:
We’ve already got some earnings on my portfolio companies, but more will follow at the end of February and March.
I’ll generally have more time in March and the coming months and will increase the number of Research Articles.
Besides the monthly Deep Dive, there will be additional semi-weekly Company Research, all Updates on Portfolio Companies, and I’m also considering new investments. So stay tuned!
Now, thanks for reading, and have a great Sunday!
Here’s a PDF of Greenblatt’s Class Notes (and many other useful resources:
Here’s my latest Research: