Joel Greenblatt defends value investing: It’s not difficult to beat the market
Joel Greenblatt, a longtime bargain hunter, doesn’t think value investing deserves its bad rap. The 67-year-old investor, now running Gotham Asset Management, believes that traditional criteria that define “value,” such as price-to-book and price-to-sales ratios, don’t necessarily represent the essence of the philosophy. “We’re very cash flow oriented … the way Morningstar or Russell classified value is not the way we look at value,” Greenblatt said Wednesday at Value Invest conference in New York. “We’re literally valuing businesses, like we’re private equity investors buying the whole business.” By the most commonly used measure, value stocks have been crushed by their growth counterparts over the past two decades. The Russell 1000 Value Index, including stocks with low price-to-book ratios and low sales-per-share growth, is up 189% over the past 20 years, compared to a near 700% rise in its growth stock counterpart. In the recovery after the financial crisis in 2008, growth stocks took over market leadership and enjoyed uninterrupted expansion in the decade-long bull run that followed. The great transition into passive investing using index funds and ETFs only further fueled growth names’ meteoric rise. Many traditional value investors found themselves in a desperate spot as cheap shares suffered massive underperformance. Still, Greenblatt, who taught a value investing class at Columbia University for more than 20 years, said seasoned players with an eye for hidden gems are still able to perform better than the broader market. “We all are familiar with the history that beating the market … is difficult for active managers and I would argue for a second that it’s not difficult,” he said. “I do think markets are emotional, and if you are [a] very disciplined value investor, which means … trying to figure out what a business is worth and paying a reasonable or low price for it because the market sometimes gives you that gift, to buy the little bit cheaper than it’s worth, disciplined investors can still do that.” Gotham Asset, which runs hedge funds as well as long-only mutual funds, has produced positive spreads for the past three years, Greenblatt said. The investor, who holds an MBA from the Wharton School at the University of Pennsylvania, says it’s “abnormal” for the largest stocks to significantly outperform the rest of the market as they did for the past 10 to 15 years, hinting that the pendulum could be swinging in a different direction sooner rather than later. “If you think you’re good at valuing businesses and can do a good job about being a disciplined portfolio manager,” he said. “We feel we can add value.”
