Joel Greenblatt is one of my favorite investors to follow. He recently did a couple of interviews which provided an interesting contrast. In one interview, he threw some shade on the “value factor” in the other interview he recommended a value factor fund as a good investment for retail investors to hold over the long run.
This time I’m actually highlighting a podcast and an episode of a T.V. show/webcast with the same guest: Joel Greenblatt.
First, Greenblatt is one of the greats. See above chart (Credit: Richard Beddard). I’ve talked about him before several times. If you’ve never heard him before, you definitely must check out his appearance with Barry Rithotz on the Masters in Business podcast.
This is a good podcast to add to your regular rotation, as Barry/Bloomberg get A+ guests and the interviews for the podcast version are basically unconstrained as far as time. He’s not the greatest interviewer, in my opinion, but overall the podcast is one to monitor.
For someone who has read pretty much everything written by or about Greenblatt in the public domain (and has even watched horrible recordings of his course at Columbia) there was not a ton of new information. If you have not, by some horrible error, read all of his books this will probably be “fascinating” for you.
One interesting line of questioning was related to Greenblatt’s motivation to continue investing. He really shared some of his enthusiasm.
The most interesting thing to me was that Greenblatt did not seem to want to discuss the underperformance of the value factor over recent history. He was like “that doesn’t impact us, because we value companies based on quality and growth in addition to cheapness.”
So, now he’s back to being a fundamental, GARP (?) investor, I suppose? Ritholtz probably could/should have pushed him on this as he was pretty enthused about the value factor and the patience required to capitalize on it in his most recent book. See The Big Secret for the Small Investor.
Most of this book was exploring the value factor, the links to Ben Graham’s quantitative work, and looking at RAFI’s “Fundamental Indexes.” He then said you could perform even better by basically using cheapness weighting versus the market cap weighting of traditional value index funds.
He also sits (or did) on the board of Pzena asset management, which is a pretty traditional “quantitatively cheap stocks” shop. It kind of seemed like he just wanted to talk about his new fund, which has had a good run. I guess it is why he’s doing the interview, so ok.
Then we get to his appearance on WealthTrack with Consuelo Mack. Again, this was pretty standard Greenblatt fare for the well-initiated. But it was entertaining:
You will of course, dear reader, note that when we get to his “one investment” he calls out…VTV. Otherwise known as the Vanguard large cap value [factor] fund.
First, this is a change/improvement from his usual go to of “IWD,” in my opinion, as the management fee is lower than the Russell 1000 value and it uses a blended value indicators, versus straight price to book (IWD might have transitioned as well, check that out if you care).
So, that’s great, but it doesn’t really square with his “diss” of the standard value factor (and factors in general) on his Ritholtz appearance. The VTV recommendation does square with his book and prior appearances/statements, so I guess maybe he just didn’t want to get into factors with Ritholtz.
I was expecting him to point out that the factor would stop working if it worked every year or decade (as I’ve heard him say like a dozen times before). Maybe he knew that had been discussed by others on Barry’s podcast and was bored with it or didn’t want to get into trying to compete with cheaper value factor funds. He did say he was “of course” familiar with Wes Gray’s work. Or maybe he was just geeked up about his mutual fund that just printed a good number.
Magic Formula…a little less magical?
In the interest of compiling and curating resources for our mutual use, here’s a link to the magic formula website. This is a pretty neat little screener, but it doesn’t really let you see the underlying ROIC or Earnings Yields, so there are others I prefer more.
I also note a big marketing banner on this site saying “Gotham Index Plus is #1” touting the outperformance since inception (which I think is three years ago). Still, that’s pretty ok for a “value” fund. You can check it out at Gotham Funds.
One final thing I noted was that on the podcast Greenblatt [briefly] stated what Wes Gray and Toby Carlisle have said before about their attempts to replicate the magic formula performance from the Little Book.
Namely, that some of the really eye-popping performance in the backtest for the original “little book” comes from un-investible and illiquid stocks and that the real life performance, while still good, is not likely to replicate those figures. I find this pretty interesting, as I would have expected him to make those adjustments back when he ran the first back test, but maybe he was just getting his quant legs under him.
Thus, I award 1000 [more] credibility points to Messrs. Gray and Carlisle for discovering and sharing this fact years ago. I’ve mentioned Gray’s site before a few times, but Carlisle has an EV/EBIT screener at The Acquirer’s Multiple. He also has a blog at Greenbackd, but he’s not very active there nowadays. I’ve read all of his books except Deep Value, which I want to read but have (to date) been too cheap to buy.
Thanks for reading!