Q & A With Super Investor Joel Greenblatt
A link to this Q&A was sent to me by Lincoln Minor (Thanks buddy!)
Click Here To Read A Q/A With Super Investor Joel GreenBlatt
Excerpts (Via Guru Focus)
Question 1. While reading your biography or rather from what is available on the internet, I noticed you graduated in 1980 and founded Gotham in 1985. I was wondering what you did during that 5 year interim ? Did you work at a hedge fund or in banking, and if so in what area? (Bertrand)
Professor Joel Greenblatt (JG): After graduating Wharton with an MBA in 1980, I decided to go to Law School to avoid taking a real job. After my first year, I decided that going to law school if you didn’t want to be a lawyer was perhaps not the best idea in the world. I took a job at a start-up hedge fund at the end of 1981 doing mostly risk arbitrage and special situation investing and started Gotham Capital in 1985.
Question 7. It seems from your portfolio that you weren’t very active in the market in the past two years. You had a concentrated portfolio before and recently you came back with a very diversified portfolio in 2008. Then it seemed that you sold almost everything. Was it because you saw the crash coming? Why did you switch funds and can we invest in your new fund? If so, how? What do you see the market and the economy doing in the next few years? (charliet)
JG: Gee, this was lots of questions. Big picture: what gets publicly filed is very limited and does not give very much insight into what we are doing. We have many different funds with different ownership structures and that have different filing obligations. For example, we manage some long/short quantitative strategies where only the long side is subject to filing under certain circumstances. Some of our funds have allocations to sub-managers who occasionally make distributions in kind that are subject to filing (so securities we did not choose directly) and some funds hold investments not subject to filing requirements. So, looking at 13F’s or other public documents only provides a very narrow perspective into what we are doing and may often give very confusing or an incomplete view of the overall picture.
Question 10. Could you share your thinking about the relationship among long-term earnings stability, long-term ROE/ROIC and valuation levels (PE, PS)? How do you think about the dynamics of these three variables when valuating a company? (grol1971)
JG: When doing in depth analysis of companies, I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of “normal” earnings power over time. My goal is to buy a company at a low multiple to normal earnings power several years out and that the company earns good returns on capital at that level of normal earnings.
Question 17. Because free cash flow growth requires not only high returns on capital but also a reinvestment opportunity, have you explored adding a criterion to the screen that would indicate the presence of a significant opportunity for reinvestment? (jdt)
JG: I think this is a great question. The big picture is: the main thing you should be concerned about in the future are incremental returns on capital going forward. As it turns out, past history of a good return on capital is a good proxy for this but obviously not foolproof. I think this is an area where thoughtful analysis can add value to any simple ranking/screening strategy such as the magic formula. But keep in mind, buying a diversified portfolio of companies who have achieved high returns on capital in the past and that can be purchased at bargain prices has worked quite powerfully, buying an individual company without further analysis of this issue is another story.
Click Here To Read A Q/A With Super Investor Joel GreenBlatt
