Earlier this year Wharton released a video where Howard Marks interviewed Joel Greenblatt. It was a short interview packed with wisdom from the two value investors.
Greenblatt first came across value investing after reading Ben Graham, which offered him a new perspective on investing. He defines value investing perfectly:
Figure out what something is worth, pay a lot less, leaving a large margin of safety.
He repeated this definition several times during the interview. Most people never get past the first part, but he offers two guarantees to those that do the work.
- “If they do good valuation work, the market will agree with them. I just don’t tell them when.”
- “In 90% of the cases for an individual stock, two or three years is enough for the market to recognize the value they see if they’ve done good work.”
So good work and the conviction to wait a few years is required. This is why most people fail before they get started. Bad behavior creeps in. They expect too much, too soon, and quit before they get rewarded. The hardest thing about investing is the waiting. A temperament to do nothing is the most overlooked quality in investing.
Yet, Greenblatt’s students regularly tell him – but it was easier to make money when you started then it is today. He has two responses to this.
The first is for special situations (Greenblatt literally wrote the book on special situations, titled You Can Be A Stock Market Genius – the worst title ever according to the author). These special situations are built for the small investor because most situations are too small to move the needle for large investors.
People who get very good at analyzing businesses with special situations make a lot of money. Because of that, they get too big to play in that obscure area of the market, making room for new investors.
His second response is toward technology and why value investing still works in an “efficient market”:
Let’s go look at the most followed market in the world. That would be the United States. And let’s go look at the most followed stocks in the most followed market. That would be the S&P 500 stocks to a large extent…Take a look at the S&P 500. From 1996 to 2000, it doubled. From 2000 to 2002, it halved. From 2002 to 2007, it doubled. From 2007 to 2009, it halved. From 2009 till today, it’s basically tripled.
That’s my way of saying people are still crazy. And that’s really an unfair thing to say because the S&P 500 is an average of 500 stocks. There’s huge dispersion going on within that average between stocks that are in favor, that people love emotionally, and stocks that people hate. So it’s really much worse than what I just described. There’s a huge dichotomy between things people like, people don’t, things that are out of favor…All this noise is going on within that average. That average is smoothing things.
The S&P 500 offers a nice measure of “the market”. But we can’t forget it’s only a small subset of the total market and mostly representative of large-cap stocks. Being too reliant on the bigger picture means you overlook everything not included in the index and miss what’s really going on in the market.
Investing seems as though it’s harder today than the past, but investing was never easy. Investor behavior is the same as it ever was. If anything, technology has only made it easier to add a new layer of complexity to strategies and it definitely compounds the short-term mindset driving the market. If anything, that combination should make it easier for the most disciplined investors.
Marks added this gem at the end to put it all into perspective:
If you want to be exceptional as an investor you have to dare to be great…But to be great, you have to be different because if you think the same as everybody else you’ll take the same actions. If you take the same actions, you’ll have the same performance. You certainly can’t be exceptional if you follow the common course. So to be exceptional, you have to be different. You also have to dare to be wrong.