Joel Greenblatt: The Common Sense of Long-Term Investing

Mark Bidwell 0:38

Hi, this is Mark Bidwell, and welcome back, or welcome to the OutsideVoices Podcast. With me this week is Joel Greenblatt, who is arguably one of the best investors in the world. In this wide ranging conversation, we talk about what’s changed and what remained the same about both value investing specifically, and broader investing as a topic in general. We also talk about how important it is to keep learning, both from wiser, more experienced and often older people, as well as from our kids and the next generation. And the third thing we touch on, which is particularly interesting to me, is the advantage that individual investors have over professional investors, specifically, our ability to think long-term. So this is a wide ranging interview, which I think you’ll enjoy. Now, Joel is a Managing Partner at Gotham Asset Management, which is an investment firm he founded in 1985. He’s also spent more than two decades on the adjunct faculty at Columbia Business School, and he’s the author of five books focused on investment strategy, including “You Can be a Stock Market Genius,” and “The Little Book that Beats the Market,” as well as his most recent book, which is called “Common Sense: The Investor’s guide to Equality, Opportunity and Growth.” Joel was also written up at length in my most recent interview with William Green in his book “Richer, Wiser Smarter,” and I think you will find, as I did, a huge amount of wisdom, and a lot of insight from this conversation. So here is Joel Greenblatt. Joel, very good to have you on the program today. When I was researching your background, I think you describe yourself as an entrepreneur at heart, and someone who’s been calculating the odds since about the age of 15. How did you get into the investment business?

Joel Greenblatt 2:34
Well, that’s a good question. I know I was interested in business, because I went to the Wharton School Undergrad, which was an undergrad business school, but I didn’t really know much about the market. My father owned a shoe business, so a manufacturer, so I understood business well, but I didn’t understand the market. I actually was studying for the law boards, to go to law school, while I was in business school, not because I ever wanted to be a lawyer, I think I just didn’t want to go to work, and that was another way to stay in school. I read an article in Forbes magazine about this guy, Ben Graham. And everything I had been learning in school about the market was you can’t beat the market. It was during a period where all they would really teach is efficient markets, and none of that made any sense to me, and it wasn’t particularly interesting, but I read this article about Ben Graham, and just the light bulb went off for me like, oh, this finally makes sense to me. Then I just started reading everything, and ended up eventually getting to Buffett, and reading everything Graham wrote, and sort of getting involved in that world. And it was just really that simple. Just a bolt like, oh, this makes so much sense, this looks like so much fun.

Mark Bidwell 3:40
And you’ve sort of been off the field, the roots of your philosophy go back to, as you say, Graham, Buffett. What was the big insight that led to the kind of the stellar returns that you enjoyed when you set up Gotham Capital?

Joel Greenblatt 3:52
Oh, that was possibly happenstance as well. I dropped out of law school after a year, I did go and then I dropped out after a year…

Mark Bidwell 4:01
I survived four days at law school, so I beat you on that one. But I don’t regret it

Joel Greenblatt 4:06
You’re just smarter than me, that’s it. You’re a lot smarter than me. I mean, if you want to be a lawyer, it’s a great place to go. I just didn’t, so it was really not a smart place to go, not a good placem or easy place to hide from work. So I got a job in an area called Risk Arbitrage, which is merger arbitrage, and is betting whether merger deals will go through. So this is after a deal is announced, alright, it’s not like anticipating who’s going to be taken over. It’s actually after a deal’s announced. Usually a stock won’t go to the price of the bid, because it takes time to get a deal done, and there’s risk that the deal might not close. So it goes close, so if the bid is $40 a share, stock maybe go to $39. And then you go bet whether the deal is going to go through and how long it’s going to take to make that extra dollar. And if the deal doesn’t go through, usually the company goes back to where it came from, which is down $10 or $20. So that business was making $1 and losing $10 or $20, which was really unappealing to me. That’s the opposite of the way that I feel comfortable betting. So I think I developed my investment philosophy from trying to avoid the risk arbitrage business, meaning I looked for hostile deals, where maybe you can make more than $1, or I looked for deals where they were giving away not just cash, but other pieces of paper that I could examine, that were things that people got into merger that they didn’t really want. So they would sell them, and they were usually often weird pieces of paper, securities or interesting preferreds, or convertible this or that, or just things that other people really weren’t looking for, and I started being attracted to those. Basically anything to get out of the risk arbitrage business where it was $1 up and $20 down, that didn’t appeal to me, I’d rather be the other way. So I started looking for off the beaten path things. And then I was looking at companies that were recapitalizing, maybe just changing the way they’re structured, maybe taking on debt, or spinning off businesses they didn’t want. And I looked at those, the things that other people were discarding, and just got into the periphery of anything but risk arbitrage.

Mark Bidwell 6:17
And so within that is, I suppose, whether it’s contrarian, or whether it’s looking at things differently from the competitors in the marketplace.

Joel Greenblatt 6:25
Yeah, I don’t know that I thought about it that much. I was just more interested, you said I was interested in computing odds, so I didn’t like one up and $20 down, I was looking for stuff that was one down $20 up, and it happens to be that if you look where other people arent’, that’s where you can find those hidden gems, I would view it as unfair bets, I was always looking to take an unfair bet, because I did the work, or read the 300 page prospectus, or something along those lines. Anyone can buy a lottery ticket, and get a big payoff, and usually, that’s probably a bad bet. But if you look off the beaten path for things that other people aren’t looking at, sometimes you can get things that are unfair in your favor. And in the investment business in particular, you can bet that way, because it could be a win-win, everyone wins by investing in something, and businesses grow in good businesses. If you bought them cheap, like Ben Graham said, and if you end up buying a good business, like Warren Buffett said, you could have a win-win, buy things that, where everyone who participates does well. And it’s nice to look for other edges, but if the game is that, if you just hang out, you make 8% or 10% a year, that’s better than the casino will give you, or the racetrack.

Mark Bidwell 7:43
Yeah. How did that philosophy evolve over time?

Joel Greenblatt 7:49
You learn by getting wounds in the investment business, when you touch the hot stove, you realize not to do that again, so it’s getting a lot of bumps along the way, obviously trying not to, but you really can’t avoid it, and then trying to not make that same mistake again. The problem with investing is, everything always looks a little different, so you do end up making the same mistake again, and again. It looked a little different, if you tilted your head this way, it turned out it was the same mistake. I think it’s just learning from experience, so you can tilt the odds in your favor, but there’s always uncertainty, and you have to get comfortable with that. I think the biggest thing that I naturally gravitated to was, because once you get a little experience, you realize those great opportunities while they come. If you work really hard to find them, you can find them several times a year, but they’re rare. There’s 1000s of stocks, there’s 100s of days every year where you could speculate on things, and being patient, turns out is, especially if you show up to work every day, and your job is investing, very hard to be disciplined and patient, because there’s so many things thrown at you. There’s news every day, there’s all kinds of things. It’s very important to accumulate some experience, hopefully learn from people who made that mistake, reading a lot, seeing what mistakes they made, and trying to make different ones yourself, rather than the same of theirs, but knowing it when you see it. In other words, being able to take a big position because you know I’m not going to see another, for lack of better term, bet like this, for another year or two, I better take a big position here. And a lot of people don’t look at portfolio management that way, but that’s one of the biggest parts of investing, knowing when you see it, and if you see something great taking advantage of it. If you put 1% or 2% of your portfolio in this great bet, that can mean you made a good decision. It can mean you made a terrible decision, you should have had 10% or 20% of your money in that, and you and you kind of missed that opportunity, and understanding that, understanding that that’s actually missing an opportunity, buying a little of something that you should buy a lot of, I think that’s something that just from knowing odds and things of that nature, just what I enjoy doing. I think that is a big reason why I was able to be successful. I think a big chunk of it was portfolio management, knowing that those great opportunities are rare.

Mark Bidwell 10:11
Yeah. And you founded the company, I think with a business partner who you’re still working with today. Is that correct?

Joel Greenblatt 10:16
No, I started in 1985 a firm called Gotham Capital on my own. My partner, Rob Goldstein, joined me in 1989.

Mark Bidwell 10:23
Okay, and you’re still working with him today?

Joel Greenblatt 10:26
I’m still working with Rob, yes.

Mark Bidwell 10:27
The reason I was asking, Joel, is the portfolio sizing, it’s very, very difficult, it’s very scary. I just wondered to what extent did you bounce ideas backwards and forwards with Robert. I’m just wondering if it could have included the Buffett-Munger relationship, which has been tremendously powerful and lucrative and valuable for investors. I’m just wondering whether you also have a partnership, which you’ve leveraged in that way?

Joel Greenblatt 10:50
Well, I heard of Rob right out of college. He’s about eight years younger than I am. I would say, we are kindred spirits in our risk tolerance in that way. Initially, it started out with him learning from me and the way I did things, and then it blossomed into more or less an equal partnership, where I truly value any input that he brings, and sometimes he brings an idea, sometimes I bring an idea. I think the reason we stay together so well, is that we respect each other’s opinion so much. So if Rob doesn’t want to do something, or I don’t want to do something, we both respect that, and we realize that, we can’t convince our partner that this is a really good bet, we’re probably wrong. And that’s amazing to have, because you can get lucky, and there’s a lot of smart people in this business, and you can get lucky and do well, or you can be smart and do well, but you can also be lucky and do well. There’s a Malcolm Gladwell book, which showed that being born at the right time is pretty lucky, so I got into the business at the end of 1981, before the biggest bull market that’s still growing. I was very lucky to get in at a great time. You can convince yourself that you’re a lot smarter than you are, so to have a partner that says, no, that doesn’t make any sense to me. That’s just great to have someone just to bounce ideas like that off of, and I think we’ve helped each other over the years to stay out of trouble. I taught at Columbia for 23 years. What I tell my students, which is very encouraging, is that Rob and I think, if we worked for someone else, we would have been fired like 8 or 10 times for making just terrible blunders, even if we did save ourselves. We both have a decent risk tolerance, and made some really big mistakes over time, and in retrospect, sometimes stupid mistakes. We realized, if we worked for anyone else, we would have been fired 8 or 10 times, and I say that to my students as encouragement that, we’ve done well on average, but we were wrong an awful lot, and we do a lot of stupid things, and it still worked out okay. Just do your best and be right more than you’re wrong, and you got a shot here too. That’s all.

Mark Bidwell 13:12
Yeah, I’m curious how often are you wrong? Is it 60-40 to the positive? It’s a difficult question to answer, but order of magnitude, how would you think about your batting average?

Joel Greenblatt 13:24
It also depends on size. So, how often are we wrong on the big big bets? I don’t know, one or two out of 10, not often on the big, big bets, but we take some smaller bets that might be 5% or 10%, and we get plenty of those wrong. You do this long enough. I’ve been doing this for 40 years, there’s been plenty of mistakes, I guess I can say. 60-40% is probably a good measure. Yeah. It’s not the whole picture, because we’re always trying to set up situations where if we’re wrong, we lose one or two, and if we’re right, we make 5 or 10. That’s the goal. Yep. It’s not quite, are you right 60-40%, you’re always taking a bet, it’s always uncertain, so I don’t even view it, sometimes when you lose money you were wrong, you said, you took a good bet. No, it’s good to bet on the Yankees or the Mets or whatever, because they have a good pitcher, and most of the time they’ll win. It still makes it a good bet, even if they lose, but it was a good bet. And so you have to stay alive, I’d say, to take the next bet, the next bet and the next bet, and that’s the key when you’re wrong. But you can still take bets and be wrong. Most of the time in this business, I was complaining once when I did everything right, and I lost money, because something unexpected happened. I was pretty young at the time, and I talked to an older guy in the business and he said, well, how many times does that happen, where you made money and you really didn’t deserve it, and that happens a lot more. You just have to keep that perspective that sometimes things don’t go your way, and it’s kind of unlucky. I love that phrase, my kids had English soccer coaches, and if you are sitting in front of the net, and you shoot your five feet in front of the net, you shoot you miss, they would always yell unlucky. It was the worst shot of all time, but they would yell unlucky. So I would just say, I love that phrase. You do get unlucky, but you probably get luckier more.

Mark Bidwell 15:29
A lot of my audience are not investors per se. Maybe we can dig into it. I wanted to talk about a couple of books, but the first book, which I read a few years ago, “The Little Book That Beats the Market,” the magic formula, can you just say a little bit about that, describe the formula, why it works? Sorry, it’s a terrible question, there are three parts to it. Why is it so hard for people to follow it? Can you explain what is the magic formula, and why it works, and we can talk about how people have struggled to execute it?

Joel Greenblatt 15:56
Sure. The caveat I give to everyone is, it’s not really magic. I call the magic formula with tongue in cheek, but it really is trying to put into a formula the lessons of both Benjamin Graham and Warren Buffett really where I cut my teeth on. Benjamin Graham was Warren Buffett’s teacher, and he came up with the idea of margin of safety. Figure out what something’s worth, stocks are not pieces of paper that bounce around, that you put fancy ratios on. They are ownership shares of businesses that you value, and try to buy at a discount. His philosophy was simple: figure out what something’s worth, and pay a lot less. Leave a big space between those two, he called that your margin of safety. Another way to say it is buy cheap. The formula for buying cheap was earning a lot relative to the price you’re paying. The simplest way to think about that is, if they’re asking, just keep the numbers simple, million dollars for our home, and you could rent it out for $100,000 a year, net of all your expenses, that’s a 10% return. And if the bank is paying you 1% or 2%, and you could buy a home, and instead of putting the million dollars in a bank, you could go out and buy a home, and then rent it out and earn 9% or 10%, that might look attractive. The first one was to get a high what’s called earnings yield on the company that you’re buying. That’s the same with a business by business for a million dollars, if it spits out $90k or $100k a year net of all your expenses, that might be an indicator that it’s cheap, not always, depends on which way those earnings are going, and a lot of other things, but that’s one indicator that it could be a bargain. Warren Buffett took that one step further, and he said, well, buying cheap is nice, but if I can buy a good business cheap, even better. And a good business is time is your friend, meaning it generally grows in value. So maybe, if something is trading at 70 cents on the dollar of what you think it’s worth, rather than 60 cents, but it’s in a good business, and if it’s trading at $7, and you think it’s worth $10, but that $10 is growing, that could give you a better margin of safety than thing you buy at $6 to $10, and that’s either staying steady or decreasing. And how do you look at a good business? In the magic formula was a business that invested its money well. In the book I wrote about, and I really wrote it for my kids, when they were pretty young, maybe sixth grade or above, so I said, imagine you’re building a store, and you have to buy the land, build the store, set up the display, stock it with inventory, and all that cost you $400,000. Every year the store spins out $200,000 in profits, that’s a 50% return on tangible capital, that might say, maybe I should take my earnings and build another store. Not many places you can reinvest that money at 50% returns. That’s called return on tangible capital. Then I compared it to another store, and I called that store, just broccoli. So a store that just sells broccoli, maybe a healthy idea, but not a very good idea for a business. But you still have to buy the land, build the store set up the display, stock it with inventory, and it’s still probably cost you $400,000, but because it’s kind of a dumb idea just to sell broccoli in your store, maybe it only earns $10,000 a year. That’s a 2.5% return on tangible capital. The magic formula simply says I’d rather invest in a business that earns 50% returns on its tangible capital, than 2.5%. What I did simply in the book was combine those to – buy cheap, buy it good, stuck my finger in the air and said, let’s value those 50-50. I did not spin a computer 1000s of times to come up with a formula that made sense. That was the very first formula I tested when I went back to illustrate this point, and it did phenomenally well. I ended up writing on that very first test we did, I wrote a book about that, showing the good and cheap is a pretty good place to start.

Mark Bidwell 19:59
You made this available to the public and said, here are the results, we back tested it, but I think you found that lots of people struggled with executing it, right?

Joel Greenblatt 20:10
Sure. So, if it were so easy, if there actually were a magic formula that worked every day and every month, and every year, everyone would do it, it would stop working. But the returns are very noisy. You could go one or two years underperforming the market, and then make a lot of money in year three or year four that made up for it. People aren’t very patient, especially if you’re blindly just following a formula. The idea behind the book was to explain why it worked, that it worked over time, and that only the people who are very patient will actually have the formula pay off for them. The only way you can be patient when something’s not doing well when you’re investing in it, is to understand what you’re doing, and understand that buying above average companies at below average prices, make sense over the long term. I took the time to explain that. But it’s still really difficult to do for everyone, including me. If you keep doing something, and you’re very disciplined about it, and it keeps losing or underperforming, very few people can continue to do that. But that’s the good thing, it’ll continue to work, because like I said, if it worked every day, and every month, and every year, everyone would do it, it would stop working. But the fact that it’s noisy lets you take advantage of it.

Mark Bidwell 21:21
It was a big insight there for me, which is, the best strategy is not about giving the highest returns, but it’s the one that you can actually stick with even in bad times.

Joel Greenblatt 21:35
I think that’s true. If you can just buy an index fund, and make the market return, which is pretty good, the only way you would want to deviate, or it has been very good over the last 50 years, particularly in the United States, but if you want to do better than that, you really have to have a contrary way of investing, and being able to stick with it over a long period of time. There’s no other way to do it, and it’s very hard. What has happened is that people start comparing on an annual basis, or every six months, or if you watch a station like CNBC in the United States, you’re watching every day, it’s very hard to underperform for years at a time, watching something every day. That’s the benefit of the magic formula while it will continue to work and why it’s so hard to do. And it’s not so bad. I think one of the things most people probably suggest, even Warren Buffett, I gave a speech at Google a number of years ago, and I opened with, even Warren Buffett says most people should just index, and I said I agree with him. Except Warren Buffett doesn’t index and neither do I, how come? And the reason is we understand what we’re doing, we’re able to value companies, we’re willing to put the time in, and we believe we can keep the discipline even when it’s not working in our favor. And that’s rare, and most people don’t want to take the time or can’t take the time to do that.

Mark Bidwell 23:02
And it’s the patience, and it’s a discipline, as you say, at the back end to follow through, and just stick with it even when everyone else might be folding.

Joel Greenblatt 23:12
I wrote a book a number of years ago called “The Big Secret.” I always tell a big secret, because no one bought that. And the big secret was patience, as you just said, so how can you read a whole book about that? I did anyway.

Mark Bidwell 23:25
I just read the book, and I was hoping I’d have it here to quote from it. But there’s a lovely book called “The Good Ancestor,” I don’t know whether you’ve come across it, but this is all about the value of long term thinking. and how rare it is, but also how important it is in today’s environment. Because a lot of the problems we’re facing are because a lot of decision making is short term based on electoral cycles, or based on personal timelines, versus thinking about the next generation, or six or seven generations ahead, which is what Native American tribes used to do in the past. It’s fascinating. If we can talk about the next book, your most recent book, Joel, “Common Sense.” in me. You’re proposing fresh solutions to big issues like education, immigration, Social Security reform, and in the introduction, you write, approaching issues from a diversity of perspectives and backgrounds can sometimes be very helpful. And then secondly, there is real value in a different mindset, of thinking like a long term investor, rather than an accountant at the Congressional Budget Office. If we go back to the timepiece, taking advantage of the long term perspective, how have you used long term thinking, and also diverse perspectives to look at some of the problems that you tackled in your book, “Common sense”? Can you maybe give us an example?

Joel Greenblatt 24:45
Big picture, individuals have an advantage, because they don’t have the pressure of their performance being viewed every day. They can invest or think in private, without pressure. If you think about, let’s say an endowment investor, they have a big team of investors to run a $10 billion endowment, and they should have the longest time horizon of all, because endowment is basically a perpetuity. Unfortunately, there are humans that run the endowment. And there’s a guy who allocates to US equities or real estate, or whatever it might be, and that person usually has three year benchmarks that he has to beat or not. People don’t have, even though an endowment should have an unlimited horizon, people don’t, they are judged over shorter periods of time, two or three years. And they make different decisions. There’s an agency problem, the person in charge has different incentives than the collective as a whole, and I think government really follows that model meaning, if it’s not going to pay off while I’m still in office, I’m not going to get credit for that, so I’m going to do things that, even if they don’t good, do good, they sound good, they look good, because that’s the most important. I don’t know how to get around that, other than to be a voice from the outside saying, gee, we can think about that. And one of the cases, and the thing that I’m particularly passionate about is education. In the United States, only one out of 11 minority and low income students in our major cities graduate from college right now. If you graduate from college in the US, you make 70%, more than high school graduates. And high school graduates make 30% more than non high school graduates. If you want to get the brass ring in the United States, you have to graduate college, and yet 10 out of 11 minority, low income students are not. The solution to that is, the reason I love education, it teaches a man to fish, rather than handouts, it’s giving people skills and opportunity. The way it’s set up in the United States anyway, I don’t know about the rest of the world, it’s really your neighborhood school that you go to. If you live in a neighborhood with bad schools, and you’ll have any money, you leave, and you go to a neighborhood with good schools, so the only people who go to bad schoold, so it’s a pre-selected system, where you’re guaranteed to have the worst schools if you have no means, okay? And that’s the way it’s set up, and that’s why 10 out of 11 don’t make it to a college degree. The solution I came up with, or at least one of the solutions, besides throwing more money at the schools, the money spent on K12 education, kindergarten to 12th grade education in the United States, has doubled in real terms over the last 30 years, and with no improvement in outcome. While money may help, it hasn’t proven to help, and there’s plenty of evidence to show that the system itself is flawed. I suggest, well, maybe we should look outside the system. One of the great things, and the things I’m most excited about is that, with the internet, and the availability of information, kids are smart, I’m involved in something called charter schools, where kids in poor neighborhoods can enter a lottery to go to these charter schools, which are government funded, but run independently outside the system by independent operators. Some of them are really good. I’m involved with the school run by a woman named Eva Moskowitz, and the kids who get into that school, and there are now 47 of them in New York City, they would be the best performing district, they’re 87%, minority and low income, yet, they would be the best performing district in the state of New York. What it says is, all the kids can learn at a high level, that’s what it really says to me, and that’s really encouraging. If you have the right support, everyone really can achieve at very high levels, that’s what it says to me. How can we take advantage of that? What I suggest is we do an end run around the system. What I’m hoping is, companies start this off like Amazon, Google, Microsoft, they set standards, they said, if you can pass these tests, or you take these courses and do well, we will consider you for a high paying job here, a career at our company, in lieu if you can pass these tests or courses, in lieu of a college degree. Once that buyer is there for passing a test or a course, then I think that whole ecosystem, once there’s a buyer, a whole ecosystem will develop to help kids pass this test or course, Some of them can be charitable, some of that can be online, a lot of those things are free or supported by advertising, where philanthropy, it’s a trillion dollar a year K12 college, $2 trillion a year thing. So philanthropy really can help. Throwing a billion or $2 billion just is going to be nothing, but put together online courses to help people pass these courses or tests, or setting up tutoring services to help people catch up, and there’ll be a whole ecosystem where, oh, there’s prerequisites that you have to pass before you get to the final test and everything else. It’s a system outside the system. I’m not saying Google has to write tests, I’m saying they just have to set standards. If there’s plenty of existing tests and courses, they just have to specify which ones you have to do. Because a lot of people miss it, if you don’t do well in high school, you don’t do well in middle school, you don’t end up in college. At any age, at any time, you can pick up and try to study for something that will get you a good career, and I think now we can finally do it. Now, there’s so many resources online, every kid can use a phone better than I can, I think they’re really complicated, those video games, I couldn’t even begin to figure out how to do it. What’s been shown by these alternative schools for low and minority kids is they can all do it, almost every single one can perform at high levels. Let’s give them a chance to show their stuff, and let’s have a buyer at the end of the day for those services outside of the current system, which I think is not irretrievably broken, but very broken, and we don’t have decades to wait. We can’t waste more lives, we can’t waste more potential in the current system. Yes, try to fix the current system, but I think there’s a lot we can do outside the current system to really make up for the unfairness of the current system.

Mark Bidwell 31:25
The insight here is that 80% of a college degree is signaling ability to follow through on finishing stuff. But there is only 20% that produces knowledge, skills and experiences relevant at the workplace.Tthat’s at the heart of the thinking, right?

Joel Greenblatt 31:42
I think that’s correct. It’s just easier for companies to use a college degree as a signaling device. It does mean you made it through, it does mean you did the work. Most people who went to college, at least in the United States know it, a lot of it’s about drinking beer and having a good time. You could get a lot more work done than what’s done in college. But you do have to get your work done, and it’s just easier for businesses to use that as a signaling device, rather than hope that someone who doesn’t have that skill set. But if you give them an alternative that doesn’t have to be tracked, in other words, if you miss your track in fourth grade, or sixth grade, or 10th grade, you don’t get to go to college. At any time, if you get your stuff together, and there’s an ecosystem outside of the current system that will let you learn, everyone has to be a lifetime learner here, and we know that the potential is there. With the right support for all these kids who are failing, 10 out of 11 are failing to get through college, all of them could with the right support. This is another way for them to show their stuff when they’re ready, because they were, in my mind, cheated out of a good education early on.

Mark Bidwell 32:50
Have you found a buyer yet? Have you had conversations with these potential buyers of you know, the Googles and the JP Morgans, and Amazons?

Joel Greenblatt 32:56
I’m just at the very beginning. Google is already setting up their own courses for people to take, and they will hire you. Jamie Diamond and JPMorgan will say, hey, college degree isn’t the be all and end all. What they haven’t done yet is set standards. Google has written tests, but I don’t need Google to write tests, they can only write, they’ve written it for three different job opportunities. Well, if you wanted to be in the HR department, or the marketing department, or whatever it is, they don’t have anything for that. It’s very easy to do for programmers with no skills. But they don’t have to do that, they just have to research, what courses and tests will be valuable, if you can do well on these, will show that you’ll be a valuable employee for us. They haven’t done that yet. I’ve had some very, very preliminary discussions with people at some of those companies to get this going, but it hasn’t happened yet, so that’s why I’m happy to talk to you, and try to continue to instigate on this front. It’s very different, and it’s not really these companies’ responsibility to do this, but it is smart for them to do, because having a diverse workforce, I show a bunch of evidence in the book, a lot of studies showing that it’s much more productive to have a diverse workforce. If everyone’s in the cookie cutter, you know, if 10 out of 11 minorities and low income aren’t making it through, you don’t have a diverse workforce taking those jobs. I think it is in those company’s best interests. I also think that these big companies, particularly the Amazons, the Googles, and Microsoft’s, Facebook whatever, are really being attacked politically for being too powerful. I think if they were more inclusive, it would be helpful with their employees. I think it would be great for them to do this,and that’s why I’m sort of up on my soapbox saying, don’t write tests, just set standards and hire these people who meet those standards, and you’ll have a much more diverse workforce. I think the whole ecosystem will happen as a result of having a buyer at the end. And I go through a lot of Clay Christensen’s business lessons, the late Harvard Business School Professor showing how change happens, and how you can subvert the current system by simple things like setting new standards.

Mark Bidwell 34:57
I can just switch now, remaining in education, but your role as a teacher, as you mentioned, you’ve been teaching at Columbia since 1996. I’m curious, how has your material kind of evolved, versus remaining true to the original Ben Graham philosophy?

Joel Greenblatt 35:36
Because I was writing “Common Sense” a couple of years ago, I haven’t taught in the last couple of years, so I’ve had some time to think about evolution, and also just think about, what am I not teaching that I should be teaching. When I wrote “The Little Book That Beats The Market,” it was 2005, and I think my oldest was in sixth grade at the time, and now he’s much older, and I have five kids, so I was able to teach a couple of them about investing. Now it’s at the point where it’s turning around, where I’m learning from them. One of them is to appreciate businesses that have not just buying cheap, but more towards what is good, and having a long term horizon. There are many more businesses, probably because of the internet, or very likely because of the internet, that have better networks, better moats than I’m used to, that you should be willing to pay more for. I think concentrating on more of those is something that I would work on to value businesses that are traditionally put in the too hard pile. I tell my students, you can look at 20 things, and you should have bought six of them, and if you only buy one, but that one works out, you are success, but opening your mind to see some of those other things that you should have bought, because there may be higher price than I would like on an absolute basis, but they’re also better businesses than I’ve ever seen in my lifetime. Some of those, especially some of the larger names we’ve been talking about, are just much better businesses than I’ve ever seen in history.

Mark Bidwell 37:13
I’m interested because “Poor Charlie’s Almanac,” I think Munger talks about, what it would cost to recreate Coca Cola, and the characteristics of that business. He didn’t talk about them in the same terms you’re talking about some of these tech companies, but these were almost bulletproof businesses when he wrote about them. I’m just wondering, was Coca Cola back in the day as good a business as Apple is today? Or is it the internet and the virality, and the networks that have just changed the game completely for the size of the moat of that company?

Joel Greenblatt 37:42
I would think, depending on what price, you go back four or five years, Apple was really trading at seven times cash flow. Now it’s whatever it is, 24. It got re-evaluated from being mostly a hardware manufacturer that everyone’s worried about the next line of phones is going to work, to more of a network of software, where you have all your information on there, and you just have to get the next one. It’s people’s entry now on their phones into the internet. even Google has to pay them a lot of money just to be their favorite browser. Apple makes a lot of money that way, so that’s a lot different. I don’t consider myself smart enough to know which of these networks will be longer lasting. IBM used to be the greatest company in the whole world. I’m aware of history, and that there are very few businesses that remain as dominant as they were. I would just say these that I see now are stronger than anything I’ve seen in history, doesn’t mean they’ll last forever. Some will, some won’t. I would say they definitely are stronger, this network effectis stronger than I’ve seen any time in history.

Mark Bidwell 39:00
Buffett talks a lot about the circle of competence. How do you, beyond talking to your kids, how do you expand your circle of competence, how do you continue to remain fresh, and look at some of these changes in the business world? I’m just curious about what you do, what routines you have, or what disciplines or you know, how do you do that?

Joel Greenblatt 39:22
I read a lot, I’m sure, if you talk to many investors, they’re always learning, businesses are always changing. They’re very dynamic, and you have to keep up otherwise you don’t know what’s going on. I spend a lot of time reading, observing. Even when I miss out on certain things, I say, why did I miss that, or how did that happen, and try to evaluate that. I’m not saying I’m great at it, but you still have to be observant, and you get a little better. I don’t think it’s these big moments, eureka moments, where now I know how to do this or not. You keep incrementally increasing your skills, increasing your knowledge base, increasing your experience base of watching things happen. One of the things I was probably most surprised at was last year, during the pandemic, when it was first getting started, and they were telling us to stay in our homes, and don’t come out and don’t do anything. That, as horrible as it was, this also wasn’t in my playbook. This wasn’t one of the choices. If you’re thinking of all of the alternatives of what could happen to a business, staying at home and don’t do anything for a year was not one of the choices, and wasn’t on my radar. Live and learn. I actually was watching very closely when Warren Buffett was speaking all by himself, at a shareholders meeting, not this past year, but the year before, when the pandemic was just getting started. I’m such an admirer of his and he’s such a mentor from afar, and he’s been so kind to share his wisdom. But I could see that he was also thrown by this, as any human being would be. And so to realize that the things that you can’t anticipate could happen was very helpful. That was definitely a learning experience for me. I’ve been doing this for a long time, I thought I’d seen everything, and I hadn’t seen everything, and it’s humbling.

Mark Bidwell 41:22
I’ve been overhauled a couple of times. I’m just curious, what’s your view on life after Buffet? I’m not even quite sure how to phrase the question. But the question is around, can we expect someone else to emerge, not so much to pick up the torch, but who our kids will be talking about in 40 years as the next Warren Buffett? I’m not suggesting someone who continues his philosophy, but someone who has dominated the investment landscape? Do you think that, in the next generation of investors that you’re aware of, there are people who are going to challenge his track record, for instance. He is, I wouldn’t say grip, but I mean, he’s clearly iconic, and many very smart people look up to him as a source of wisdom, if you like. Is it a one off, or do you think, there’s going to be someone coming out of China, or maybe Lee Liu, or someone? There are names out there, I just wondered how you think about this, or is it almost a heresy for me to even ask the questions?

Joel Greenblatt 42:25
No, it’s more about building on the foundation that he’s put together, because he’s considered what people call a value investor. But he is not like a mathematical value investor, like oh, buy something that’s selling at a low price relative to its book value, or low price to sales or something like that. He literally tries to value businesses, he realizes stocks are ownership, shares of businesses, tries to value businesses, which necessarily looks forward, necessarily looks at how is that business going to grow over time, how are the earnings going to grow over time. That factors into valuation. And then being disciplined enough to wait for your opportunity to buy at a discount. So that’s a philosophy that will never go away. How do you value businesses that may have a bigger growth trajectory than we’ve seen, or grow faster than we’ve ever seen, or lose money for longer than we’ve ever thought about, before it takes advantage? One of the great things about this new world, at least is the way I look at it, being an old dog, is that traditionally, when you had bricks and mortar and you were building factories, stocking inventory, and all those things where you have to spend money upfront, and you had to get paid on it, otherwise you go broke. Now, there’s a lot of businesses that are so sticky. Let’s say you have a software business, where they’re charging $1,000 a year to use their software, and you’re monitoring your inventory, or whatever it is, and it’s something you need, and it’s not so easy to switch. And you agree you don’t sign a contract, but you start renting it for $1,000 a year. Now, since it’s a pretty sticky business to use someone’s software, and it’s hard to switch, high switching costs, maybe the average investor lasts eight years. So you make $8,000 over eight years if you’re the software supplier. But let’s say that it costs you $2,000 to advertise to get that customer. So traditional accounting would say, well, you spent $2,000 to get that customer and you only got $1,000 this year, so there’s no incremental cost to someone else using your software. Well, traditional accounting will say you’re losing $1,000. Alright, the software manufacturer will say no, I spent $2,000. And over the next eight years, I’m going to collect $8,000 and that’s a good bet. Accounting convention will say I’m losing $1,000 on that customer right now, I spent $2000, I only got $1000 this year. There’s no contract, so I can’t account for getting eight years worth of revenues. So we’re going to account for this as losing $1,000. But actually, the lifetime value of that customer is closer to $700 or $8,000. And therefore, investing $2000 now is a great investment. That’s kind of their capital spending. It’s not capitalized as an expense. So there’s a lot of things that have changed, and it’s not like business has changed. You’re really evaluating what this customer is worth to me, but it’s just showing up in a different way. That’s really a revelation that I never, in the old style of doing business that wasn’t software oriented, or long term network oriented, where this customer is going to last in my network a long time. It’s just totally different. And so I was an accounting major at Wharton, and don’t ask me what I did for four years. But I was an accounting major at Wharton, and this isn’t stuff we really thought about. We thought about, you’re losing $1,000, that’s bad. Actually, you just have to have a more holistic view of the business, and not every business that people are going to last seven or eight years, because someone will come out with a better product in a few years, and maybe they won’t last. So there’s still uncertainty, and you still have to make those bets, but accounting is not really going to help you.

Mark Bidwell 46:09
It reminds me of, I don’t really know if you’ve read the bio of John Malone, “Cable Cowboy,” but the story of how he’s building out all these cable assets in the 70s and 80s. They spent as little money as they could, they avoided taxes, and for many years, Wall Street just didn’t understand it, so this is a loss making machine, because he was using accounting in a very different way. There are glimmers, I suppose, of today’s world back then, but it’s very, very different today, as you say.

Joel Greenblatt 46:35
I just took down the name of the book to read, so thank you.

Mark Bidwell 46:38
It’s a fantastic book, fantastic.

Joel Greenblatt 46:40
I’m familiar with his history, obviously, and I wrote about when he first made his fortune with Liberty Media in my first book, “You Can be a Stock Market Genius,” I talked about how brilliant that was at that time, but I never read that book, and I’m gonna go do that, so thank you.

Mark Bidwell 46:52
“Cable Cowboy.” So Joel, I know we’re buffing up against time. I sent you three questions the other day, and I just wondered if I could just ask you, each of them. First one, what have you changed your mind about recently?

Joel Greenblatt 47:07
We talked a little about it already, really being willing to look at businesses, at least in my day job, looking at businesses, and being willing to pay more for great businesses. I know I learned that from Buffett early on, good businesses, but some of these businesses, and these network effects and these flywheels that happen in businesses, are so good. I just naturally shied away from companies trading 20, or 30 times earnings, because traditionally, that hasn’t been a good place to invest. It still isn’t, if you bought them off. But there are some businesses that deserve those multiples, and that you can project further out than I’m usually willing to. I’m thinking of, when I first looked at Etsy, when it was, 1/5 the price, and I made some estimates, and I didn’t want to make too much. I missed it, let’s just put it that way. The bottom line is, I think, in retrospect, I didn’t give them enough credit. I really changed my mind about wanting to look at some of these network businesses and really try to evaluate them. I probably won’t get it right all the time, for sure, but the more things you look at, the more chances you have to find those gems. I just have increased my perceived circle of competence to be willing to look at even better businesses than I’ve ever seen. That’s one thing that I started doing, which has been fun.

Mark Bidwell 48:33
Lovely, lovely. Second one, perhaps you’ve already answered, reading. Where do you go to get fresh perspectives, especially when facing tough challenges?

Joel Greenblatt 48:43
I’m in my 60s now, and so I realize, I can now look to my kids to really keep me up to date on certain things. It’s not that I look at them, they say things that aren’t from where I’m coming from. They’re really very insightful, and it’s so much fun. It’s just a way to be able to talk to them. I have a couple of girls involved in science, I have a couple boys who are involved in investing. I have one son who’s in the art world, and one of the reasons I taught for so many years is just to hang out with people a lot younger than me. It’s not more fun I’d say, it’s additional fun, because their perspectives are so different. Between my kids and teaching, it’s been just a wonderful way to talk to the younger generation. They’re so smart in my mind, they assimilate so much, maybe that has to do with the internet making things more accessible. Maybe they’re just more interconnected with so many different ideas and things of that nature. It’s been pretty incredible. If you want to keep learning, you usually think about talking to people older than you, and of course I do, but people who are way younger, really come from a totally different perspective. It’s just good to understand it a little better.

Mark Bidwell 50:10
My 12 year old son, he’s been glued to Roblox for the last 18 months. And I didn’t even pay any attention, until I saw the IPO documents, and I thought, I’ve missed an opportunity there. Who knows whether that’ll be a good decision or not, but yeah, you’re right, I certainly underestimate the wisdom one can get from the next generation. And then the final question, what’s been your most significant failure, or low, and what did you learn from it, and how did you apply that learning?

Joel Greenblatt 50:39
I would say that’s a work in progress, but I think, as we talked about, just even most recently over the last year, COVID has forced us to change the way we do things, and forced us to lock up closer to home. Luckily, I don’t live in the city, so I’ve been forced to take a lot more walks. By a lot, I mean 100 to 1, something like that, just smelling the roses a little bit, as opposed to a very frenetic life, which I enjoy. I like my business, otherwise, I wouldn’t do it, and I like learning, and I like all those things. But really taking time out to smell the roses, and I’m really taking that to heart, particularly at my age, I got so much out of it. I think I’ve not taken enough time to smell the roses as good a time as I’ve had, I could do a lot more of that. That’s something I learned during the past year, that I plan to take a lot more advantage of, slowed down a lot. I think I’ll actually be better at everything if I do that. I feel like I haven’t done enough of that, and I feel like, as horrible as COVID has been for so many people, it was a mixed blessing for me, because it got me to stop a little bit, and think about things I wouldn’t have, maybe sooner than I would have. I’m grateful for that opportunity.

Mark Bidwell 52:12
Wonderful. Joel, thank you very much for your time today. I’m very, very appreciative of your time, your wisdom, the materials you’re putting out there. If people are interested, where can they follow you? Do you have any particular social media platforms you’re active on? Do you have a website? How do people find out more about your work?

Joel Greenblatt 52:32
Well, I don’t have any of those social media outlets. I have written four books, they’re on Amazon, my latest was “Common Sense,” and that’s, I guess, my latest thinking, and I have some other investment books. That’s my fun, so that’s how I get out there, but I am not very good at promoting them, except I appreciate the opportunity to talk with you today.

Mark Bidwell 52:56
Many thanks, Joel, and good luck with maintaining that new momentum of slowing down and smelling the roses as things begin to pick up again. I think it feels like we’re almost emerging, but yeah, there’s some important lessons that we can keep hold of, even though things get back a little bit to normal.

Joel Greenblatt 53:14
I agree, and it was a great pleasure to speak with you.

Mark Bidwell 53:17
Great. Many thanks. Thank you.

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