The world’s greatest investors: Joel Greenblatt

Greenblatt was born in Great Neck, New York in 1957. He graduated from the Wharton School of Business of the University of Pennsylvania and finished his MBA in 1981. He joined a firm specialising in “merger arbitrage” (whereby investors profit from mispricings that arise during merger deals), which inspired him to look for more examples of inefficient markets.

In 1985 he set up his own hedge fund, Gotham Capital, with an investment from Michael Milken, the “junk-bond king”, which he ran for 25 years. Since 2012 he has been running Gotham Funds, which offers a range of mutual funds with hedge-fund-style strategies.

What is his strategy?

Greenblatt began as a traditional value investor, looking for companies on low price/earnings (p/e) ratios. He also had a very concentrated portfolio, with only around ten holdings at any one time. Over time he has grown more wiling to look at more expensive companies – as long as their expected growth can justify their valuations – and to diversify. He has also gone from being a long-only investors to holding several short positions.

Has it worked?

Between 1985 and 1994 Gotham Capital returned 50% a year before fees, before returning all outside money. Over the next 15 years Greenblatt successfully ran his own money, before shutting Gotham down in 2009. Gotham Fund’s flagship fund, Gotham Absolute Return Fund, has assets of $916m and has returned 47% since September 2012, compared with 16% for hedge funds that deploy a comparable level of leverage.

What were his biggest successes?

Greenblatt is cagey on his individual investments, but he did make a lot of money by investing in Michael Burry’s hedge fund, Scion Capital, which shorted mortgage-backed securities just before US house prices tumbled. Ironically, Greenblatt had at one point tried to pull out of the fund, only to be prevented by Burry triggering an emergency clause in the contract.

What lessons are there for investors?

Greenblatt has written three bestsellers for private investors: You Can Be a Stock Market Genius (1997), The Little Book That Beats the Market (2006), and The Big Secret for the Small Investor (2011). These suggest focusing on two main ratios: earnings yield before interest payments and tax; and return on capital (ROC). A high earnings yield (or a low p/e) suggests that a company may be undervalued, while a high ROC suggests the company makes good use of its capital.