Joel Greenblatt Can you state your name, your title, and company? Yes or I should do it. Yeah, I'm Jim Grant. I'm the head of Grant's Interest Rate Observer and what I do for living is right. I want to interview famous people, but who are famous perhaps for reasons that the public is not fully aware of. I hope to elicit from them new thoughts, frank admissions of things that they had not previously admitted to, and I want to get to know them one or twice. Well, hello Real Vision. I am Jim Grant and with me today is Joel Greenblatt who is all of the following things. He is the last guy who hit 400, figurally speaking, at financing compounded money between 1985 and 2006 monthly rate, at the annual rate of 40 percent that is not a typo. Joel is the author of many books and one of them which I have right here, I'll get into this in a moment. He's a benefactor of public education in the City of New York, he's a teacher. He's all of those things. With regard Joel to your investing acumen and career, I want to ask you concerning the fore mentioned astonishing record which by the way if you were a resource that gives you a blood test concerning, about this record, why did you stop? Well, I haven't stopped investing. The way you get to high compounded returns, a couple of ways. One is to be very concentrated, meaning just have a few of your favorite things. The other is to stay smart. By mean concentrated I mean 6-8 names were traditionally 80 plus percent of our portfolio. I have a partner Rob Goldstein who joined me in 1989. So he's a big part of that record as well, and the problem with owning 6-8 names, at least for outside investors usually is that every two years or so, you wake up and lose 20 or 30 percent of your net worth in a matter of a few days. If you know what you own, sometimes that's because you made a mistake, sometimes that's because the market doesn't like what you think for a period of time, but it happens like clockwork. So that's very uncomfortable for many investors to live through. The other way to get high returns is to stay smart. So after five years in business, we returned half our outside capital, after 10 years in business, we returned all our outside capital. So the problem with compounding at high rates of return is you end up with a lot of money, so you have to keep investors. That's a serious problem as many aspire to it. Well, so you have gone from a life as a hedge fund guy. In fact Joel, now that I think of it, you are rather an old school fellow because you made your record in the world of hedge funds which world is now shrinking, probably so many say, and you have come up through the ranks as a value investor. Now having fallen on difficult times and furthermore, you teach value investing and special situations investing in the MBA program at Columbia. MBA is now thought to be a vestigial degree, no sense getting one. Did you ever wake up in the morning and wonder why you're not with it? Well, one answer is good I'm old. The other is really I can only do what I know how to do, but it really comes down to investing, I try to simplify it so I can understand it and stocks in particular or ownership shares of businesses. If I'm good at valuing businesses, that's what I do, and then when they're available at prices at a good discount to what I think they're worth. There is an opportunity, people are people, that doesn't change. So they are quite emotional at times, and there always be opportunities for people who know how to value businesses. Even in the private market, we just saw what happened at WeWork. Those are very smart people giving billions of dollars at a very high valuations and sometimes it doesn't work out. So people are emotional. Now, this big WeWork speaks, it seems to the strict form of the efficient market's hypothesis which holds basically that information well distributed is in the marketplace before you know it and this market absorbs it efficiently of course and diffuses it and prices accordingly and you can add nothing to the soup because it comes pre-made as a can of Campbell's. Yet in the case of WeWork, one day it was valued, they say, at $48 billion. The next 15 minutes later, 48 actually, eight. Are markets efficient? That is a great question. I wouldn't probably be sitting here if I thought so. I actually learned that theory when I was in business school way back in the '70s and I had very learned professors trying to be convincing about that, but all what I had to do was look in the newspaper and they used to have 52 week high and low lists. At one point during the year, stock was worth $50 a share and six months later, it was supposedly worth 100 and both prices were efficient and nothing generally happened in the business. So what they were teaching me didn't seem to make a lot of sense to me. So my whole career has been sort of a rebellion against what I learned in business school that stocks are efficient. I would say they are often efficient, I would say it's tough to know enough about a lot of businesses to outsmart the market. On the other hand, stocks ownership shares of businesses. If you pick the ones that you're pretty good at valuing and our discipline, swing it, as Buffett would say, you don't have to swing it every pitch, swing out one of 20 pitches. Swinging one of 50 pitches doesn't really matter and wait for your pitch, there are always going to be opportunities because people don't change, people are very emotional. The method that is pretty straightforward, the value of a business is the discounted value of all the cash you're going to get over period of time. So you basically have to make two assumptions. One is whatever earnings there are today or lack of earnings doesn't matter, you're trying to project what those earnings are going to be over the next 20 or 30 years, what the cash flow from that business will be over the next 20 or 30 years. So you have to project a growth rate, and then you have to use a discount rate that is appropriate to discount how much risk you're taking to your guess. If you make slight changes in those numbers, you discount at six percent, start at eight percent, it grows at four percent instead of three percent, the value of a business could double or halve depending on just very small changes in those assumptions. So when people are optimistic, they tend to make optimistic assumptions and when they're pessimistic, they tend to make pessimistic assumptions and stocks could be all over the place. So it doesn't make sense to me that over the long-term, the market will always be right. So markets are just as efficient and just as dispassionate as the people who operate in them? Yes. So what you're saying is they're not particularly efficient. I get this question for my MBA students and I've gotten same question at one point during the semester every year sometime towards the end of semester for the last seven or eight years. Question goes something like this, "We know active managers haven't won over a long period of time, we know that if you buy an index fund you can do quite well, and congratulations Professor Greenblatt on a great career but isn't the party over for us". My students are second year MBA, so roughly 27 or 28 years old. So I just tell them, "Hey, why don't we go back to when you guys learned how to read? Go back a couple of decades, take a look at the most followed market in the world, that would be the United States. Let's take a look at the most followed stocks within the most followed market in the world, those would be the S&P 500 stocks, and let's just take a look on what's happened since you guys learnt how to read. So I said from 1997-2000. You can be that young? Well actually from 1996 to 2000. Okay. The S&P 500 doubled, from 2000 and 2002 it halved. From 2002 to 2007 It doubled. From 2007 to 2009 it halved, and from 2009 to today it's more than tripled. Which is my way of explaining to them that people are still crazy, and it's way understating the case. Because the S&P 500 is an average of 500 names. If you actually lift up the covers and look at the dispersion going on amongst those 500 names between which are in favor at any particular time in which are out of favor for whatever reasons, and you believe what Ben Graham said that, "Look, this horizontal line is fair value. This wavy line around fair value are stock prices, and if you have a discipline strategy to buy more than your fair share of companies when they're below the line, and if you're so inclined to sell or sell short more than your fair share when they're above that line. The markets throwing us pitches all the time." Of course there are agency problems, there are behavioral problems, there are all kinds of reasons why people really can't execute this but it's not because we're not getting enough pitches. Yeah. So in one of your books, I guess it was the second edition you said, " I wish I had emphasized this more in the first edition ". You said that, "Picking the market is not the same as making money." Well, if the market's down 14, you're down 32. I would just say, " You're not the happiest guy in the world." You might not be able to avoid that and that might be a good performance but there is a difference. When prices are high, beating the market, buying the cheapest stocks might not be good enough. Right now we take a look at bottoms up something called the Russell 2000 which is stock number 1,100 in market cap through 3,000 so small-cap stocks, and if we value those stocks just with some common metric saw on valuation over the last 30 years, right now we're in the first percentile. For that index versus those last 30 years meaning the Russell 2000 has been cheaper 99 percent of the time over the last 30 years and more expensive one percent of the time, and it's not a projection but we can go back in time and see what's happened from the first percentile and-. Anything good Joel? Not good. You're right on that, markets, but not terrible. I mean markets been down an average of 3-5 percent from here over the next year. The S&P 500 is actually a little cheaper. It's in the 14th percentile but cheaper 86 percent of the time, more expensive 14 percent of the time and that in the past from the 14th percentile, it's been up 3-5 percent of this [inaudible]. This is an equity centered view of the world, of course that's what you do for a living. But in the world of bonds, there has nothing like this in 3,000 years or so of recorded interest rate history. I'm talking about the phenomenon in Japan and parts of Europe who have negative nominal interest rates meaning that the borrower gets paid for the privilege of taking your money. Now that is something new under the sun, and finance mainly, nothing is new under the sun that's new, and how do you factor this new thing of zero percent yields or less into your valuation of equities? That is a great question that I don't have an answer to. But luckily my job is to look at all the choices. If I'm looking at US equities, what we generally do is rank them in order according to our assessment of cheapness. So we buy the cheapest ones and we tend to short the most expensive ones. So there's always something that's the cheapest. So the biggest thing in the world is outside of your purview? Well, what I would say is, in my books I've suggested that when the risk-free rate is below six percent, which it's been for quite awhile. Positive six. Pardon me. Positive six. Positive six. I should point that out now. I never thought I would have to, but yeah. So if the risk-free rate's below six percent, I tend to use six percent as the risk-free rate. So in other words I'll look at the yield I could get from owning and earning asset. Right. It's not that I can't buy something that only has a five percent cash flow yield on the price that I'm paying. As long as I think that five percent is going to grow over time, that could be the flat six percent over a long period of time. But I'm not going to price things just to use positive yields because I don't know how to calculate negative yields, but let's say you had a one percent positive yield. If you start paying a 100 times earnings for a lot of businesses, you can get into real trouble. So at worst I'm being very conservative in the way I look at things, and if I can't beat my theoretical six percent risk-free rate, I pass until I can find something that can beat that. So a dear friend of mine from yesteryear, Michel David-Weill who was the head of Lazard Freres in New York, a very aristocratic Frenchman, and the late Alex Porter and I for some years had a value fund in Japan, long only, and we bought shares of businesses mind you that merely pay pieces of paper trial. We bought shares of businesses at prices of less than net current assets. They were the old-time net nets, and they were cheap in 1998. They were cheap in five years later, and they were cheap 10 years later and we went to see Jane and Michelle was an investor of ours, we went to see him after a particularly long and vexing period of a 100 performance and he said with a Gallic shrug he said, " Sometimes you have a bed to cate ", which words I treasure. I suppose one shouldn't actually fall back in them too often but value has had a dry patch, and I wonder if this dry spell might not be the result of the aforementioned ground hugging interest rates. You may discount businesses at six percent as stroke of caution and conservatism. Others perhaps are valuing using discount rate much lower which allows the distribution of semi free money with which to fund venture capitals startups which disrupt the world, and which perhaps have made established legacy businesses much more vulnerable to serious business problems. Could this be what's wrong with value investing? I don't think to be honest there's anything wrong with value investing, but I have to define my terms. Value investing to me is not buying stocks that are low price book low-price sales, but the way it's defined by Russell or Morningstar, it's defined as stocks having those types of attributes. If I were a private equity investor buying a whole business, I'd be looking at cash flows. No private equity firm's going to go buy a business because it's selling at a low price to book value. They want really high value. That's why they do it these days. It is, but the private equity investor I'd invest in is someone who is really looking at cash flows, and the successful ones over time are the ones that are actually looking at cash flows. So if we define value investing is figure out what something's worth and paying a lot less. By definition, it will never go out. So we're cash flow oriented because that's where we think drives value. So for instance, momentum has worked for the last 30-40 years not just in this country but on average but across the globe with one or two exceptions. So why won't we do momentum investing? The reason for that really is that let's say it didn't work for the next two years. It could be that it's just cyclically out of favorite works over the long time, we just need to be patient and it will work. Or it could be that there's plenty of data, and research papers, and computers, and ability to crunch numbers, and the trade now, and it's not so hard to figure out how stock used to be down here and now it's up here and it's got good momentum, and the trade's become crowded, it's degraded, and that's why it doesn't work over the next two years. Two years from now I wouldn't know the answer to that question. Is it just cyclically out of favor momentum or has the trade become crowded and degraded? But if we're looking at cash flows and valuing businesses just like we value a house. They're asking a million dollars for a house. We ask a few simple questions to whether it's a good deal or not. One might be as, "Well, if I could rent it out net of my expenses for $70,000 or $80,000 a year, that might help justify the $1 million price that I'm paying." Another question I'd probably ask is, what are the other houses on the block going for, and the block next door, and the town next door? So, we do that too with businesses. We say, "How cheap is this relative to similar businesses? How cheap is this relative to all businesses? How cheap is this versus how it's been priced over history versus other businesses?" So we use our measures of absolute and relative value to try to zero in on fair value. On average that seems to work pretty well. That's how most people would value an earning asset. That's what we do, and it's possible that that kind of analysis doesn't work over the next two years but I'm not going to stop doing what we're doing because there's a difference between causation and correlation. Momentum has correlated with good returns in the past. Low-price book, low-price sales for many years correlated with getting probably more than your fair share of companies that are out of favor, because if a company is selling close to the historic cost of it's assets, people aren't paying much of a premium for the actual underlying business. So pretty good indication that it's out of favor. So if you buy a bucket accompanies that have those type of metrics, you're probably going to end up with more than your fair share of companies that are undervalued, but that's once again also a correlation. All right? So what we look at is causation, and that's valuing businesses and the way we value businesses is the cash flows. Tell us, tell the viewers and me about life with five or six concentrated positions all those years? I want to invite you to reminisce about some of the ones that really worked, the fabulous ones, and then some of the ones that perhaps moved into your sleeping pattern and kept you up at night. Can you give us some examples of what worked and what didn't work. Sure. Once I wrote up in You Can Be a Stock Market Genius was a stock called Marriott which people know. Back in the early '90s, Marriott was really in two businesses. One was the hotel management business and one was the owning hotels, building hotels, selling them to someone else, and then taking back a management contract for their hotel management business. The building hotels business was a capital intensive business with okay returns, but it was really a way for them to build new hotels that you could get management stream for their other business. What happened in the early '90s is, they got caught in a real estate downturn where they ended up with a lot of hotels they had built, that they could not sell. So their CFO at the time was a guy named Steve Bollenbach, who's a pretty smart financial guy. What he figured out is, hey maybe we could spin off this hotel building business because that has all our assets. Because it has all our assets, we can put all our debt on that business. There's nothing in our covenants that says that we can't do this because all the assets will go with the spin-off for the bad business and we'll just keep the really good business, the asset-light businesses, which are primarily the management company that just gets a stream of earnings with no capital investment separate. So when I read this, I said wow this company called Host Marriott, which was the one that was going to be stuck with all the debt and all the real estate that you couldn't sell, all the hotel real estate you couldn't sell. No one's going to want to own that. Most people would say, oh boy, this is going to be a pristine great Warren Buffett type company, where it's asset-light with a chunk of earnings and that'll be great. Just generally, where you tend to find bargains is in things that no one else wants. This looked like one of the worst things I've ever seen in my life. At least that's the way it read in the paper. So that's the first place we decided to look. It sounds good then, right? It sounds like no one else would want to own this thing, and the way spin-offs work are that they're not an underwritten security, so shareholders get them. People were really investing in Marriott for the management business not the hotel owning businesses, especially in a real estate downturn in the 1990's. So we thought there would be ready sellers and sell this thing at any price. Of course, if it's going to go broke, that's not a good thing but the interesting thing about Host Marriott that made me want to look a little more, was that Steve Bollenbach, the grand creator of this spin-off plan was going to go manage Host Marriott, the bad spin-off. So that said. How much stock did you buy in Host Marriott? Well, one of the first questions that I say to look at is, where are the incentives? So he was well-incented to make Host Marriott work out very well. So we were excited to take a look. It turned out when you actually lifted up the covers. I didn't write as very detailed to discuss in the book, but the bottom line is that a lot of the debt on Host Marriott was non-recourse. So that it only went against the subsidiary. There were a lot of assets in the parent that were worth a lot of money with no debt on it. Some of the debt that was on the parent was also non-recourse. In other words, they own the San Francisco Marriott. Right So if you couldn't pay your $250 million that you owed to the bank, all the bank could do is take the San Francisco Marriott. They couldn't attack the rest of the business. So it turned out that we figured out that stock was trading at four dollars. All the assets that were unencumbered by debt were worth at least six dollars and we thought that the encumbered assets had the potential to be worth a lot more. So one of the, I think, keys to investing and one of the things I said in the book, we're very good at buying, not so great at selling. But look down not up when making a big investment, meaning how much can we lose? We thought if we paid four dollars for a business that had six dollars in assets with no debt, our chance of losing money over time would be low and the other assets that were very leveraged with all the debt could be worth a lot more than the debt if the recession turned around. So a four dollars stock became? It became a $12 stock when people woke up to this. Within the year, I wrote a book and so you're going to write up your winners. This was one that worked out quite well for us. All right. Let's have a sleep-depriving loser. We invested in a company that owned trade shows. They owned something called Comdex, which was a computer trade show in Las Vegas. We know that at that time in the early 2000's, that computer companies went out of business all the time, so that the trade show could be at risk for that. But there were always new computer companies coming in. So every year there were 2,400 companies that displayed in the trade show. Four hundred would go out of business and 400 would come in. This was really a lesson. Everyone knows financial leverage. You put up a dollar, you borrow nine. It's pretty risky to buy an asset for $10 if you put up a dollar and borrow nine. So that's called financial leverage. Operating leverage works like this: if you own a trade show and you can rent space in Las Vegas at two dollars a square foot and you can re-rent it out at $62 a square foot to someone who wants to display in your trade show. As you get more people coming to display, you rent out a little more space at two dollars and you re-rent it out. More is more better. Yes. So that's $62. So if you can do that, every incremental person who will rent some more space, $60 of the $62 in revenues drops to the bottom line. That's called operating leverage. So when we invested in this, I understood the upside of operating leverage. Boy that sounds pretty good to us. We created in a complicated way, because this was also a business that was restructuring and spinning off a piece. They were going to sell a little more stock in the business as six dollars, yet we were able to create it at that same time for about three dollars by buying one piece and shorting another. So aren't we so clever? We also loved the business. So everything played out as anticipated. They did an offering at six dollars. People became enamored with the business because of this operating leverage we talked about, and the stock pretty quickly went to 12. So so far, the story sounds sounds pretty good. We paid three while everyone else was paying six, the stock went to 12. You sold at 12? Yeah. It wouldn't make a great story if I sold at 12. So unfortunately, about September 8th 2001, they made a big acquisition of another trade show. Borrowed a lot of money because they were so good at managing the trade show. Unfortunately, 9-11 came a few days later. People were scared to travel by plane which is what you have to do to attend a trade show. So that operating leverage and the financial leverage they took on. Yeah. Too far? Yes. So it's good to know about those things. Long story short, we sold that at one dollar. We'll draw the curtains of charity over that one. Now could you, Joel Greenblatt, could you do today, say you're starting out. Now you're 27 as opposed to the 37 you look like you are. But say you're 27, right? Could you start up a special situations and value fund highly concentrated and replicate what you did between 1985 and 2006? Does the world allow this today? Well, two things. One, I said to get very high rates of return, you have to be concentrated and small. The other thing you have to do is get very lucky. Okay? Malcolm Gladwell wrote a book that was I thought really great. I think it was called Outliers. The example he was talking about is why are 75 percent of hockey players born in January, February, or March? The reason that they're all born at the beginning of the year is that kids are segmented based on talent. When they are seven and eight years old and it really is a big advantage to be a little older being born in January, February, March than October, November, December because they are older, they are bigger. They get selected out at very early age to go into these prime programs. So they were born at a lucky time. No. You know why they were born in January and February? Because their parents knew they were going to be professional hockey players. They wanted them to come into the world during wintertime. Obviously. I think that makes some sense because we are talking about Canada. Anywhere else, maybe not. But you could be right. So luck counts too. Right. Luck counts too. When I got into the business at the end of 1981, the market had not gone up in 13 years. No one was going to Wall Street at that time. Why would you? To buy bonds, Joel. Then of course, that was right before a huge bull Market. So you have to get lucky too. But, big picture answer to your question is, yes. If you stay selective, special situation is still very pregnant area, the world is a big place, you just don't have to stay in the United States. There's a lot of public companies all over. So if you are very selective, there is an opportunity. You would get the type of returns that we did because there is a lot of luck involved in there. When you are very concentrated, the math says that you can get very unlucky and hurt those returns. That didn't happen to us. I am a little older and wiser and probably some of the things I did when I was young I wouldn't have been quite as concentrated. The basic idea is still the same. Anything you want to tell us about any youthful indiscretions you want to mentioned to the viewers of Real Vision Now? It doesn't have to be a financial Joel, anything will do. How about, no, I didn't say. I want to ask you about the United States and parts outside it. Now you mentioned the world outside the 50 states but in your present vehicles, what you are not concentrated which are kind of magic formula driven into your present working life you don't venture outside of the 50 states. Why is that and what might cause you to reconsider? Well, we do have a big research team. So when I wrote, "The Little Book That Beats The Market", I had done some work on net nets that you have mentioned before when I was in business school with some of my cohorts, I and wrote a master's thesis on that. That was published in the journal portfolio management. We had morphed more towards the way Buffett looks it. Ben Graham said, "Buy cheap, figure out what something is worth, pay a lot less, leave a large margin of safety." Warren Buffett made that little twists that made him one of the richest people in the world. He said, "If I can buy a good business cheap, even better." So we had morphed luckily pretty quickly towards buying good business cheap and after we had returned outside money, I'd always wanted to go back and test the way, what I had been teaching my students, what we had been using to make money. In the same way, we had tested Graham's methodologies to show that it still could work. I wanted to test what we were doing. In the very first test we ran, was something using crud database using crud metrics for cheap and a crud metric for good. The very first test we ran, worked out so well I wrote up a book about it. We didn't spin the computer thousands of times to say, "Hey, what's the best way we can do this?" When we looked at that, those results, my partner Rob Goldstein and I said, "Hey," we didn't even try very hard. We call that, "The not trying very hard method". We know actually how to try. We know how to value businesses. We know how to do the work. We know how to tear apart balance sheets, income statements, cash flow statements. So we set up a research team to do that. So I would say the principles of the magic formula, buying cheap and good are great principles to learn. I really wrote this book. I got five kids. I wanted them to understand some of the principles and I had them in mind at a minimum that if they were reading this, at least at a seventh or eighth grade level, could they follow what I was saying? Could they understand it? So it was the greatest way to teach the Warren Buffett type of investing. But what we do, takes a little more work. We have a big research team, we have a big tech team. We do a lot of things buying cheap and expensive stocks. In the United States, it's pretty easy to go long and short. We know the rules, we can manage our risks. There is a lot of information that we have. We know the trading rules. We know the regulations. Outside the United States, we do manage long only portfolios. We do cover companies in 26 countries outside the United States but we don't do long-short investing. The reason for that is, there is a lot more complication. There is currency risk. There's regulatory risk. There's different trading prices. There are different rules for shorting and expenses for trading. So it adds a lot more complications and when you go long short and put on leverage, you want to understand your risk very well. So there's a lot more complications internationally for us to be long-short investors. We are long only investors because there is plenty of opportunities outside the United States and because countries have different ways of accounting for things and regulatory authorities and everything else. It's a nice advantage for us to actually sort of homogenize the way we look at these companies outside the United States to the way we look at how does value gets created in a business and we're just valuing businesses outside. We don't care how they reported it. If we can figure It out exactly what's happening in the underlying business, there's a nice opportunity set out there too. Speaking of nice opportunities, where do you see them? Well, as I mentioned before, the S&P 500 on a relative basis is a lot cheaper than the small cap universe. So maybe the Russell 1000 even. Unindexed stocks are cheaper or more expensive? The smaller stocks are much more expensive. They are in the first percentile towards expensive over the last 30 years. I mean, they have been cheaper 99 percent of the time. The S&P were not cheap and have a negative expected return based on at least looking at history. It's not a projection. Larger cap stocks like the S&P 500 and the Russell 1000, they are in the 14th percentile expected returns three to five percent over the next year, eight to 10 over the next two. So subnormal because the market averaged about 10 percent returns during those 30 years but not negative. If you can pick the cheapest stocks within that index because we don't go out and buy indexes, we have the chance in larger cap names to find some relative bargains. We have the opportunity to create a portfolio. What we do with companies that have seven or eight percent free cash flow yields in a two or three percent interest rate environment with nice attributes as far as returns on capital and growth prospects and keeping their margins and things that. That just doesn't sound like 40 percent a year, Joel. No, I don't. But you're very familiar with compound interest tables. So no need to make 40 percent a year ever. Just live longer Live longer and if you can earn anywhere 10 percent or above, that compounds quite nicely. Six percent even doubles every 12 years. Forty percent doubles in less than two years if my math is correct. Hey Joel, let's talk about the people in your life, professional life who might have influenced you. I see that Michael Milken was an early supporter of your Gotham hedge fund. Who else in the world of finance influenced you, inspired you, taught you? Well, one of the reasons that I like to teach and write about one of the few things in the world that I know something about or at least I think I know something about is that, and I explained what I learned in business school. I did learn some of the basics of accounting and how to look at balance sheets and income statements, but I didn't learn much in my investment course. Actually, I got the lowest grade in my investment management course. The professor said, "Joel, there are a lot of things to do in life. I wouldn't go into this buy-low sell-high stuff. This seems not to be you." I was learning parametric quadratic programming which is putting together diversified portfolios in three-dimensional space didn't resonate with me as well as pretty much everything else in my life. So I didn't have a lot of interests in looking at that. Actually, I read an article in Forbes, my junior year. I never even thought about going into the stock market. I didn't understand business. My father was a businessman. He was a shoe manufacturer. You pick up things at the dinner table when you talk about businesses. I am looking at Joel's shoes. Nice. Well, he made them for K-Mart and places like that. So I'm not wearing those shoes today but at the dinner table, there's some pretty. My wife's dad was a medical researcher and doctor and so I go to her for medical intuition and she'll go to me for business intuition. That really comes a little bit of how you grew up and the environment you grew up and what you talk about with your parents. So at that edge, but I didn't know anything about the stock market and I read an article in Forbes, my junior year at Wharton and it was about a stock picking formula of Ben Graham's net nets. The way Graham described how the stock market work resonated with me immediately. It was like a light-bulb went off. I said, "Oh, what they have been teaching me makes no sense to me, but this makes a lot of sense." So I started reading everything that he ever wrote and that eventually led me to Warren Buffett. In one of your books, I've forgotten which one. You said something that Graham said, and then you rephrased it in the way Ben Graham might have said it. The way you said it was rephrasing Graham's voice was a little highfalutin, and somewhat Augustan, very high level of pros and I'm thinking that the classically trained Ben Graham, although he inspired you in finance, might not have inspired your prose style, which to me is a wonderful mixture like Dave Barry, because you have a fabulous sense of the absurd, if I may say so, and EB White for clarity, and we spoke earlier, I mentioned a third party. We have a fellow who wrote the fabulous book on Trying to Live in New York City at $100,000 a year. Refresh my memory, who was it? That's Andrew Tobias. Andrew Tobias. Sure. So Tobias, Barry, and EB White to me, the three streams that flow into the river of the prose of Joel Greenblatt. Are you coming at it, Joel? Sure. Well, I'm a big fan of Andrew Tobias' reading. So I've read all his books and love his style. So you don't deny it then? Pardon me. You don't deny it? No. Not at all. Okay. I'm a huge fan of Andy's and we're good friends and he has been a great influence on me. Okay. Let's talk about your writing style, what about the literacy of the students in your Colombia class? You've been teaching there 23 years, right? Yes. As an actor? Okay. One of these days we would make you a full professor. I just know it, but for now you're not just yet. That's not the way it works but thank you. Okay. How has the quality of your students, their level of interest, their preparation, how has that changed over the course of a full generation? How has the nature of the students, their capacity, and their preparation changed over the course of 23 years? Improving, disimproving. They are not listening to this, just speak from the heart. When I first started teaching in the mid '90s, what I was teaching wasn't particularly popular. Like now. Yeah. I think that's fair, and there was some point in 1999 or 2000, my students were quite dismissive. You and the teaching assistant, nobody in the room. I would just say that there was more skepticism about what I was teaching. Students have always been great. One of the reasons I like to teach is because they're a lot younger than me and they're very excited to learn and that's always been the case. You fairly learn from them too a little bit, don't you? Teaching and writing actually has been one of the most wonderful things for me. I'm glad. I hope that I've helped some of my students or some of the readers. But if you have to teach a lesson or you have to write something down. Yeah. Really think about, why did you do such a thing, or what were you thinking when you did that, and you have to keep simplifying to actually get down to the core. The simplifying thing, look, works so well. I've forgotten which are the titles I'm referring to but you explained discounted cash flow, and it's impossible not to understand it, impossible. Try as you might, you get it. Now I want to ask you about Ben Graham, who was your mentor whom you never met. I'm going to propose something to you. That Ben Graham was the exemplar not only of the theory and practice of value investing, but also in his heart. He was the exemplar of moral courage and of persistence. He wrote the first edition of Security Analysis, came out in 1934, and Graham had made a lot of rookie errors, not so, he's not a rookie exactly, made a lot of errors and he almost went broke under depression. Here, he's determined to write this massive book as he was professionally failing, and you know how laborious. Maybe you don't know, maybe you're first draft. In fact, I suspect you're rather a first draft, you're not going to know about this, but the rest of us Joel, writing is something better having done than doing. It as a job of work, and here Graham. I feel the same way by the way. Produces this. Yeah. You're saying well, you're good. Produces this in his moment of professional trial. What do you think about that? I haven't actually, and that's a great question because I haven't thought about him in that way and it just makes me feel even better that he wanted to share what he has learnt. Fabulous man. Yeah. One of the best ways to learn is by doing. Yeah. Not by doing well, but by doing badly, and making mistakes, explaining what those mistakes were. I've tried to teach investing to my kids, and one of the best things is, hey, if you could actually learn from my experience, that's so much better. You're going to make mistakes anyway and you'll learn from that, but if I can save you from a few of the mistakes, you'll make new ones bt at least I'll save you from this at least. Investing is always making the same mistakes by the way. They have a little different face on them when you're making them. Any of the way. I don't know. You accept that humanity would catch on from time to time. You're supposed to buy low and sell high. Everyone does the opposite. Right. Now is there such a thing as a value gene or can you teach the precepts and the instincts, I guess you can't teach anything by definition, but can you teach value? Or is it something that you come to the table with as you came to at work? Well, look, everyone can't beat the market because they're smart, right? As you said, being dumb and not having a degree doesn't help either. Yeah. I did say that and I stand by that. It's not a good idea to be dumb and no degree. But if I teach 40 students a year and I've been doing it for 23 years, and then there's 10 other top 10 business schools and 20 other top 20 business schools and they're churning out all these pretty smart people who know the basics of investing, and the vast majority of them go out and fail if their job is to beat the market, if that's what they're taking this course for. It can't just be brains and it can't be hard work and it can't be being able to do a Spreadsheet that goes up 40 pages and doing all the work. It actually comes down to understanding what you're doing in a simple way, contextualizing things in a much bigger sense. Then you have to avoid all the pitfalls of behavioral problems. Meaning everyone's very emotional when they invest, especially when they lose money, it's not fun. There's agency problems. How are you doing when you lose money? Do you lose it? I enjoy it. I'm a little different. No, I don't enjoy losing money, I try to avoid it. Does it freak you out? Yeah. I think it freaks me out as much as anybody else. Perhaps more experience is helpful. So I come away from your books with the idea. So you say, "A little life bares time ladies, anybody can do this". You had a deeper vein of analysis perhaps than the ladies did, in fact much deeper vein. But I'm reminded of what you hear in church sometimes. You hear a minister will say, "Anybody can be a saint. You don't have to be a super human being to be a saint". What he doesn't say is, all you have to do a subordinate your every earthly desire to something divine. That's all. In the case of investing, very secular line of work. If I read you correctly Joel, what you're saying is that you don't have to be a genius, you don't even have to have a degree. All you have to do is to lay aside your every human instinct to be impatient and impetuous and to do the wrong thing. That's all. Look. Bottom line is unless you buy a stock at its all time low, which I don't recall that I've ever done, it's down after you bought it. Yeah. Right. So every time you buy a stock, unless you've got the absolute low, it's down after you bought it. So the only defense against emotion is actually understanding what you own, and it's important to know that. Like I gave a talk at Google a few years ago, and I said, "Even Warren Buffett said that most people should just index", and then I said, I agree with him. Then I left. No, then I said, "But then again Warren Buffett doesn't index and neither do I, how come?" It comes down to understanding what you're doing. There are very small percentage of people who are good at valuing businesses. Some of them are probably coming out of my MBA class I'm hoping, but it's one percent of the people, two percent of the people could actually, and I'm not saying there's not better things to do with your life, I'm saying one or two percent of the people are able to value businesses or actually know enough to find the businesses they can value. Then they got to go out and be interested in buying them, and then overcoming their emotions when they inevitably go down, which is every single time. Right. So you are seeing Wall Street in your face? Down in your face? But always. Joel, you have something called Value Investing Club, which is like the Forbes 400. This is rather more exclusive, 250 members. Chosen not by mere application, but through sifting, and once you get in, you contribute ideas online. Do you not? Yes. You don't need a tavern someplace because you're online, and there's a monthly winner. That person gets what, $5000? Yeah, every two weeks. Yes. Every two weeks. So how's that working out? Value Investing club. It's great. I mean at the time, we had returned all our outside capital. My partner at the time, John Petry and I, I was interested in the Internet, when it was an early thing in 1999. Well, it was a thing, but it wasn't as big, and people were really interested in the Internet bubble, and millions of eyeballs, I was more interested in it in a way, I always wanted to do an investment club, and talk to other smart people, and run ideas against them. But the internet seemed to me a great way to meet, at your leisure, wherever you were in the world, to get together and talk investing. At the time, if you went to a Yahoo! Message Board, 99.9 percent of it was noise. But John had actually found on a Yahoo Message Board, we had one of the best positions we had ever come up with ourselves, and John Petry found someone on a Yahoo! Message Board that had nailed it exactly right. We thought we were so smart, we're the only people on Wall Street to figure it out, and then some guy in a Yahoo message board wrote it, it was complicated glory. It was pretty amazing, and so a light bulb went off for me, and I said, hey, there's intelligent life out there, what if we could put them all together? The rule we made for the club was, if you could get an A plus in my class on your investment paper, maybe three people out of 40 a year could get A plus on an investment thesis, we'll let you into the club.The club's free. You just have to share at least two ideas a year, and rate other people's ideas. Then you get to stay in the club and you share your best, and the rule was not anything other than you have to give as good as you get. So was just a great experiment using the Internet. It's going strong 20 years later. Still great conversations on that site. They're not all right, they're not all pearls, but it's a great place to learn. So actually, we do allow people to get a delayed feed, it's called valueinvestorsclub.com. So if you want to learn, and we're talking about that, and you want to learn from other people's experiences, and how good investors think, it's good to go to that site. First, you post an idea, and then all the other members beat you up. They ask tough questions, you're trying to answer them. As a result of that back and forth, it's a wonderful way to learn without losing your own money. You're going to lose your own money anyway, but maybe you'll lose a little less before you start turning around. Is there a way to get into this verified company? It's now above 250 members, we've loosened that up a little. So it's harder to get into than Harvard, as far as the percentage of people that we let in. But people keep trying, you get to keep applying every year. So that's better than Harvard. Can you say you're a world-class yachtsmen to get in? You can say whatever you want. It's really only the quality of your investment thesis. Joel, you are among other things a benefactor of education in the city of New York. You have lavished substantial gifts on public schools, and you also stand with the Success Academy in trying to bring choice to middle and lower-income households that don't have the financial wherewithal to move to a better school. Now, city government says it does not embrace the idea of charters. What are you doing about that? Apart from voting, I suspect every five years, or four years, as the case may be. But how do you push back against the covert hostility? I was going to say overt, but it's a little bit more sinister than that. What are you doing about this? I think it's now gotten to be overt, so at least it's not as behind the scenes. I helped start Success Academy. We now have 47 schools. Those schools, if they were looked at as a school district, or the best-performing School District in New York City, yet, the vast majority of our kids are black or brown, and poor, we're considered lower income. So the idea of originally was, look, I don't want to argue about this. I would like to be involved in the schools that were created by Eva Moskowitz, who is the CEO of Success Academy. The idea was to do one school in a way that was replicable, meaning you don't only have to do it with the top one percent of teachers, anyone could make a really good private school. The idea was to create a model that was replicable, build one school that works well for kids who didn't have good choices because to get in is an open lottery. What year was this? The Success Academy, the first one opened in 2006. There are now 47 schools. Then to build out about 40 schools, and by time we got to 40 schools, we said, hey listen, anyone could build a one-off success story, but if you can repeat it and repeat it and repeat it again, who could argue with us Well, we found out that people can argue with that. It's very sad, but the big picture is this, it's very simple to me, middle-class kids, wealthier kids have school choice. They get to move to a neighborhood with good schools. They get to send their kids to private schools if they can afford it. That's their choice. Families with lower incomes, unless there's a charter school where they can apply for a lottery, don't have a choice of where they can send their kids. So if it's not a good choice, and that's generally what happens, the places they can afford to live, don't have good local schools. If they did, it would quickly gentrify. So lower-income parents don't have the same choice that better off parents do. Right, that's the problem. How do we work around the implacable fervent hostility at City Hall? Vote the bums out? I guess. To some degree, that's true. The battle's not going well, pretty much across the country. In Massachusetts, for instance, kids in their Charter schools, Stanford Study, MIT study, get two years of education for every one year that they're in a regular public school. Charter schools are public schools, but if kids in charter schools, public charter schools in Massachusetts, get two years worth for every year, compared to one year worth of education in a regular public schools. Yet, Massachusetts overwhelmingly voted to have no more. It's just that a minority of people who are poor can take advantage of these charter schools, and so it's really middle class and wealthier parent's voting that less well-to-do parents shouldn't have a choice. We have a choice, you don't. That's effectively what happened. Even in Massachusetts, it's amazing, and I'm writing a new book, and I'm telling the story that when you lose in Massachusetts, the rule was that if a public school loses a student to a charter school, the public school still gets paid 100 percent of the payments for that student, even though the student is not there, in the first year after. Then for each one of the next five years, they get 25 percent of that payment. So a student who left six years ago, the public school is still getting paid for that student that left. Yet, the vote was 62-38 against charters, and if you look at all the middle-class and white neighborhoods, they voted against the poor neighborhoods having a choice, even though they had it. So that's the way I view it. If it's not going well in Massachusetts, it's not going well in Illinois, it's not going well in California, so just like educating about investing, I don't have a solution other than an education, ironically. Educating people about giving people who don't have a choice is a choice All right Joel. I'm going to list, again, the things that you have done. Your vocations and avocations. I want you to tell me which at the moment is what you're all about, right? So we got, the word is Philanthropist, benefactor to me, is it? So I'll use that one. Benefactor, that's part of you, teacher is part of you, investor to be sure, father, and prospectively grandfather, and author. What's Joel Greenblatt really about now? Well, the most fun I've had in my life is being a father. I hope we talked before on air about nature and nurture, and we have five kids, and my wife's been amazing. I give her most of the responsibility for bringing them up, but nevertheless I always say we have five opposites, meaning there's a lot of nurture involved, and I think the victory is watching each one of them. If they are able to pursue their passion, whatever that might be, and they're able to do that. That's what I consider successful, and it's so much fun seeing how they develop, and helping in a small way. So that's the most fun there is. Ladies and gentlemen, Real Vision. Thank you for watching. This is Joel Greenblatt, father of five. Joel, it's been a pleasure and an honor. Thank you. I can't help but notice that not many people get the message that you have to wear a bow tie. You have to dress like you mean it, right? You can't walk around in jeans, or sneakers, or stuff. You guys are cool. Did you know that some of our shows, including the one that you just watched, are available on Real Vision free? As the name suggests, this is a free channel that is distributed via cable networks, Apple, YouTube, and most importantly, the biggest finance websites. This aggregation means that Real Vision free is one of the biggest finance channels in the world. In fact, it gets in front of 50 million active traders and investors, and you know what? 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