Intelligent Investing with Steve Forbes presents Joel Greenblatt, adjunct faculty member at Columbia University, co-CIO of Formula Investing
Major take-aways from the interview:
- 70% of active managers can not be passive index funds like the S&P500 due to high costs, high fees
- Unfortunately, for the 30% who beat the index over the last 3, 5 and 10-year periods, there is no correlation with how they do over the next 3, 5 and 10-yr periods
- A disadvantage to standard index investments is that they are market-cap weighted; the more overpriced something is, the more of the index it represents, the more underpriced something is, the less of the index it represents
- A superior alternative is equal-weight indexes, for example, in the S&P500, Stock #1 is allocated the same amount of capital as Stock #500; errors are therefore random rather than systematic
- Greenblatt’s firm created a “value-weighted index”: the cheaper something is, the more weight it gets in the index
- Key metrics for analyzing a business
- High adjusted FCF
- Returns on tangible assets
- Why do good companies sell cheaply? People are worried that earnings power over the next few years will not be as good as the past so they’re willing to sell at a discount; institutional investors will systematically avoid uncertainty and provide you opportunity to buy cheap
- Most business schools are teaching Efficient Markets theory, not Benjamin Graham; good news for value investors because it means you have less competition
A House Rises 