There's a clarity that comes with great ideas: You can [easily and simply] explain why something's a great business, how and why it's cheap, why it's cheap for temporary reasons and how, on a normal basis, it should be trading at a much higher level. You're never sitting there on the 40th page of your spreadsheet, as Buffett would say, agonizing over whether you should buy or not.

Joel Greenblatt

Categorized in : Ideas Sitting Levels

Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot.

Joel Greenblatt

running funny ideas

The secret to investing is to figure out the value of something - and then pay a lot less.

Joel Greenblatt

investing secret pay

Remember, it’s the quality of your ideas not the quantity that will result in the big money.

Joel Greenblatt

quality remember ideas

The more confidence I have in each one of my stock picks, the fewer companies I need to own in my portfolio to feel comfortable.

Joel Greenblatt

portfolios company needs

Value investing strategies have worked for years and everyone's known about them. They continue to work because it's hard for people to do, for two main reasons. First, the companies that show up on the screens can be scary and not doing so well, so people find them difficult to buy. Second, there can be one-, two- or three-year periods when a strategy like this doesn't work. Most people aren't capable of sticking it out through that.

Joel Greenblatt

two people years

There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can’t be a good value investor without being an independent thinker – you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do. The back and forth that goes on in the investment process helps you get at that.

Joel Greenblatt

smart independent thinking

Look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.

Joel Greenblatt

alternatives decision looks

If I plug my estimates into the Magic Formula, and it comes out cheap, that's good.

Joel Greenblatt

plugs formulas magic

Something out of the ordinary course of business is taking place that creates an investment opportunity. The list of corporate events that can result in big profits for you runs the gamut—spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales, distributions.

Joel Greenblatt

rights opportunity running

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. 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.

Joel Greenblatt

thoughtful simple past

I wait until an investment idea is so good, it hits me over the head like an anvil.

Joel Greenblatt

anvils waiting ideas

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. A holding period of more than one year also works quite well as the factors are persistent in years 2 and 3.

Joel Greenblatt

goal earning years

I still believe that for good business analysts a concentrated portfolio is a good strategy combined with a long term horizon. Once again, the secret to success in following the formula strategy is patience, a quality in short supply for both professionals and individual investors alike. I think investors should have a large portion of their assets in equities over time.

Joel Greenblatt

should-have believe thinking

Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer. Do your planning and asset allocation ahead of time. Choose a portion of your assets to invest in the stock market - and stick with it! Yes, the bad times will come, but over the truly long term, the good times will win out - and I hope the lessons from 2008 will help get you there to enjoy them.

Joel Greenblatt

winning years thinking

So one way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety. The upside, while still difficult to quantify, will usually take care of itself. In other words, look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.

Joel Greenblatt

safety risk decision

If you spend your energies looking for and analysing situations not closely followed by other informed investors, your chance of finding bargains greatly increases.

Joel Greenblatt

increase chance energy

Figure out what something is worth and pay a lot less.

Joel Greenblatt

figures pay

Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.

Joel Greenblatt

luck skills long

Value investing doesn't always work. The market doesn't always agree with you. Over time, value is roughly the way the market prices stocks, but over the short term, which sometimes can be as long as two or three years, there are periods when it doesn't work. And that is a very good thing. The fact that our value approach doesn't work over periods of time is precisely the reason why it continues to work over the long term.

Joel Greenblatt

two long years

It just seems logical that sticking to investing in only a small number of companies that you understand well, rather than moving down the list to your thirtieth or fiftieth favorite pick, would create a much greater potential to earn above-average investment returns.

Joel Greenblatt

small-numbers average moving