Joel Greenblatt’s hedge fund realized an average return greater than 50% per year over
its 10-year life.
He and his partner closed it down when they felt they were getting too large.
They believe (and maybe you could say, “have proven”) that the small investor has an
advantage in the world of investing.
The top 5 lessons new investors can learn from Greenblatt’s wisdom.
Coming up!
I love studying the legends of the investment world.
And I’m glad that today we get to do it together.
Because the lessons I’m about to share with you are going to put you (at least) one step
closer to building your rapidly-growing, highly-diversified net worth.
As I go through them, if you find these lessons and tips helpful, don’t forget to subscribe
and click that notification bell because there is so much more to learn to help you become
even more successful.
Joel Greenblatt is a value investor, meaning he actively looks for stocks that he believes
are undervalued by the market.
He’s written four books and they are each packed with so much experience and insight.
It was his first book “You Can Be A Stock Market Genius,” that really set me on the
path I’m on today for how I find undervalued stocks.
If you’re interested in any of these books, I’ve linked to them all in the description
below.
Let’s get started!
Lesson 1 - have a strategy.
Do some research about how you want to invest and specifically what you want to look for
as you conduct your stock research.
Do this before you even start analyzing individual stocks.
Investing in individual stocks can be dangerous if you don’t have a strategy, you don’t
have a plan, you don’t know what you’re looking for.
Greenblatt says, and I love this, “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.”
You might get lucky, trying to trade stocks without a specific strategy, but that doesn’t
make it any less dangerous.
When you aren’t sure what you’re doing, when you don’t have a plan, you’re more
likely to make mistakes - you’re more likely to blow up your portfolio.
Lesson 2 - focus on the downside.
It seems like most people try to focus on the upside - how much could this go up compared
to where it is today.
That is important, absolutely, but you’ll likely fare better (over the long run) if
limiting your downside risk carries more weight in your ultimate decision.
That means, focusing on companies that have a large margin of safety.
Margin of safety refers to the difference between the value the market is placing on
a particular stock and your estimation of its intrinsic or fair value.
That way, even if your calculations and estimations are wrong, you could still make money, or
at least it's less likely that you’ll lose as much.
He says, “Look down, not up, when making your initial investment decision.
If you don’t lose money, most of the remaining alternatives are good ones.”
Lesson 3 - invest for the long run.
Individual stocks (entire markets for that matter) move all over the place when you’re
looking over short time periods - every second, every hour, every day, every month, or even
every several months - there are so many factors contributing to each move.
But think about this, just because a particular stock’s price shoots up one minute and then
a few minutes later shoots back down, (which happens…)
Did the underlying company’s value - like what it’s actually worth, what someone could
reasonably pay for it - did it change very much over those few minutes?
Usually, no…
Greenblatt says, “Although over the short term Mr. Market may price stocks based on
emotion, over the long term Mr. Market prices stocks based on their value.”
So do your research.
Run your analyses.
And invest for the long run based on value and ignoring emotion.
Lesson 4 - know what you’re doing.
I created an entire video on the extreme importance of knowing what you’re doing and why, of
not just blindly relying on somebody else’s, some “expert’s” hot tip.
At the beginning of “You Can Be A Stock Market Genius,” Greenblatt lists a few investing
basics.
He says, “1.
Do your own work.
2.
Don’t trust anyone over 30.
3.
Don’t trust anyone 30 or under.”
Even more than his delivery, I love this advice.
That’s why, in that video I just referenced, I tell you (sincerely) that you should even
supplement what I say with your own research.
It’s part of the reason I encourage people who disagree with me to do so in the comments
because healthy discourse can help all of us.
(Actually, that reminds me of another great lesson from Greenblatt, I’ll throw it in
as a bonus lesson after we get through number 5, so stay tuned.)
But this point - of knowing what you’re doing - is also why I created my Patreon page,
as a way to disclose everything.
My research.
My observations.
My.
own.
trades.
So you don’t have to just take what I say at face value.
So that you can see behind the scenes - you can have everything you might want and need
from me to supplement your own research and analysis.
Lesson 5 - stay the course.
This is part of the reason why lesson 1 (having a strategy) is so important.
If you don’t really understand what you’re doing, what your strategy actually is, you’ll
likely bail at the first sign that things aren’t going perfectly in your favor.
Value investing in individual stocks is a longer-term trading strategy.
That means, sometimes the companies you’ve identified as being undervalued, don’t realize
their fair value for a year or two (or three) - as an extreme example, that happened to
a lot of stocks during the dotcom bubble when most investors didn’t care about anything
that didn’t have to do with the internet.
That didn’t mean that those stocks didn’t have any value.
It just meant that the market was not yet paying enough attention to them to realize
that value - which is kind of what you’re waiting for if you’re a value investor.
If you’ve done the research, you’ve conducted a proper analysis, you know what you’re
waiting for, then in those cases, you should stay the course.
And The more you know and understand, the easier (and less stressful) that is.
Greenblatt points out that, when faced with two or three years like that (of underperformance),
most people aren’t capable of sticking it out.
But remember: it’s because it's difficult, that it continues to work and provides us
(you and me) with opportunities to outperform everyone else.
Now here’s that bonus lesson I promised: welcome challenges.
Greenblatt says, “There’s a virtuous cycle in people having to defend challenges to their
ideas.
Any gaps in thinking or analysis become clear pretty quickly when smart people ask good,
logical questions.
...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.”
Most people try to avoid confrontation.
But challenges to your investment ideas - although they may temporarily damage your pride - can
protect the bottom line of your portfolio.
They can help you see things from a different perspective.
I can think of a few times in the past, when writing for Seeking Alpha even, that commenters
presented me with material information (that I hadn’t found on my own), that weakened
or sometimes strengthened my investment idea.
And I’m always grateful for that - it makes me and my readers (and now my viewers) better
traders.
So there you have it - the wisdom of the legendary Joel Greenblatt.
Have a strategy, focus on the downside, invest for the long run, know what you’re doing,
stay the course, and welcome challenges.
I’d love to hear from you.
What are you going to do with this?
Which lesson will you learn from today?
What action will you take to change the way you approach your investment strategy?
I can’t wait to interact with you in the comments.
And if you’re new here, congratulations on starting your journey to a rapidly-growing,
highly-diversified net worth.
If you want to continue learning, then don’t forget to subscribe and hit that bell, so
you don’t miss any of these timeless lessons.
Hit that like button if you liked it.
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And most importantly, don’t stop learning.
I’ll see you in the next video.
Take care.