Joel Greenblatt is one of the best investors in the world. In this wide-ranging conversation he talks about the difference between luck and skill, stock options, traits of successful management teams, lessons learned from Warren Buffett and what scares him the most in today’s market.
Joel is the Managing Principal at Gotham Asset Management 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.
Here are a few highlights from the conversation:
I learned from teaching and being in business that some people are in it for the money. Because if you’re pretty decent at it, you tend to get way overpaid for your contribution to society, let’s put it that way. And so some people are in it for the money—and some people like solving puzzles and figuring out what’s going to happen next. You can see the passion of those people, that they’re just in it for the combination of challenge and interest. Those are the people who long-term tend to be the most successful. And you can see that too. It’s simplicity of thought, being able to boil things down to a few simple concepts of what makes this attractive, and also a passion for figuring it out.
There are a lot of smart people out there, a lot smarter than me. But if you look at things from 40,000 feet or a different angle—that’s where I have tended to have my most success. I just realized “Yes, everyone is looking at it this way, but I think that’s not the right way to look at it.” When you recognize that you have this other way to look, and that makes total sense to you and all the pieces fit when you look at it that way, I think those are the great opportunities.
One of the reasons I write is because I got to read Ben Graham and all the letters that Warren Buffett wrote and everything else. And it’s true: It’s great to learn from your own mistakes. And you don’t learn unless you’re really investing your own money and feeling how it feels to be wrong and lose a lot of money. All those things are true, but you can learn from other people’s mistakes. Learning from the past and reading how smart people think—it’s only helpful. I’d rather not make those mistakes myself. I’d rather read their mistakes and make different ones.
The best rule of thumb that I learned was if this management team was good at allocating capital before I walked in the door, the assumption that they would continue to be good was really good. And if they were really bad at it, no matter what story they told and how smart they seemed and how logical what they planned to do was, the better assumption would be that they would continue to be bad at it.
You don’t create long-term value by cheating your customers. You don’t create long-term value by not treating your employees well, or being a good member of the community. You don’t create long-term value that way. You might create the appearance of short-term value, which may be reflected in a stock price, which may affect your stock options because you tricked someone into thinking you did well. But that’s not the way to create long-term value. I think if we just adjusted things, the role of a company is to create as much long-term value as possible. And the only way to do that is to treat employees well, to treat your customers well, to treat the environment well.
I just figure if I can’t figure it out, they don’t want me to figure it out and I got to go to the next one. I’ll spend a lot of time doing it, but I can’t figure it out. Then I just assume that’s intentional. And I don’t view that as a good thing…There are lots of companies and there are lots of things to look at. You don’t want to waste a lot of time on things that immediately don’t make sense. I pass a lot on, maybe too much, but it’s like I said, as long as we concentrate on the ones that make sense, that’s more important than errors of omission.
And so much more. It’s time to listen and learn.