Joel Greenblatt is a fund manager and professor at the Columbia University Graduate School of Business in New York.
He began his career as a manager in 1985 creating his own hedge fund Gotham Capital.
From 1985 to 2006 he obtained an annualized return of 40%.
In today’s text, we will focus on his biography and the magic formula that made him one of the richest men in the world.
Joel Greenblatt was born on December 13th 1957 in Great Neck in New York. He graduated from the Wharton School on the University of Pennsylvania where he got his B.S. 1979.
Even then, he had an extraordinary talent for business and his paper “How the Small investor can beat the market” ended up being a part of the Journal of Portfolio Management.
In 2006 he published his book The Little Book That Beats the Market, translated into Spanish as The Little Book That Beats the Market.
In this book, Greenblatt presents a “magic formula” that, according to his criteria, should beat the market in most long periods of time.
Joel Greenblatt is an American academic who is primarily involved in the management of investment funds and also known for his role as an investor and writer. Joel Greenblatt was chairman of the board of directors of Alliant Techsystems and is the founder of the New York Securities Auction Corporation.
Joel Greenblatt is a value investor known for his famous ” magic formula ”, he is also a professor at the Columbia University business school. In his work as a writer, he is the author of 4 books: Market Sense and Nonsense: How the Markets Really Work (and How They Don’t) (2012).
The Big Secret for the Small Investor: A New Route to Long-Term Investment Success (2011). The Little Book That Beats the Market (2006). Joel Greenblatt is also known for his contribution and support to education in New York, where he has donated to schools in Queens and Harlem.
In his investments, Joel Greenblatt follows the philosophy “ value investing ” so he is looking for large companies that are quoting at a low price in relation to their intrinsic value. For this, Joel Greenblatt developed what is known as the “ magic formula ”.
In his work “ the little book that beats the market ” the academic explains what this famous formula consists of, which consists of two parts and how he uses it when investing. The first part basically consists of identifying shares that are trading at a low price using the profit-per-share ratio between the prices.
In this way we try to locate those companies that obtain great benefits in relation to the price that is going to be paid for their shares.
Once identified that companies are quoting at a reduced price it is necessary to select those that are really a good business, that is, look at the profitability of the assets (ROA) since a company that has a good profit compared to the cost of the assets that generate them will have greater capacity to reinvest the benefits and generate greater value and profitability.
In summary, Joel Greenblatt uses the “ magic formula ” to identify which companies that really mean a good business are trading at a reduced price and take advantage of this situation to invest in them and obtain good returns.
In 2009, the American academic launched Formula Investing, which is a monetary management firm that follows the “ magic formula ” as an investment strategy. In this way, through this patented system, the company is dedicated to managing and managing value portfolios and offering management and advisory services to both individual and institutional investors interested in using this formula.
Joel Greenblatt has achieved an annual return of 30.8% for 16 years in a row through his Gotham funds, how can you invest like him and get these returns in the market?
Joel Greenblatt in his book “The little book that beats the market” explains how to properly approach the stock market and details a formula, which he calls the magic formula, which consists of the combination of two very simple factors to consistently beat the market and win on the stock exchange by doing a quantitative type of trading.
All Greenblatt’s work is based on value investment and part of the following question. Can I translate the investment work of Warren Buffett into mathematical terms, the axiom of buying good companies at low prices?
As we know, the value investment is based on the fact that the market is irrational, and that irrationality allows us at certain times to buy shares in companies well below their real value.
“Sometimes, Mr. Mercado is in such a good mood that he sets a price much higher than the true value of the company. In those days, it would surely make sense for you to sell your share of the company.
Other days, he is in such a bad mood that he sets a very low price. In those days, you may want to take advantage of the insane offer that Mr. Mercado has made to sell you shares at a very low price and buy the part of the company that belongs to him.
If the price established by Mr. Mercado is neither too high nor extraordinarily low, in relation to the value of the company, the most logical thing would be for you to decide to do nothing. In the world of the stock market, this is exactly how it works.
Finally, the stock market goes from that, to buying companies and obtaining benefits through them, either by dividends or because their shares increase in value. If we choose properly and buy those companies that are not in the spotlight and are therefore cheap, the benefits we will obtain will be spectacular.
“When you buy 1% of a company, it means that you buy 1% of the future benefits that company will have. What we should assess is whether what we are paying for that 1% is appropriate compared to what we will achieve in future earnings.
As we said, based on these premises, Greenblatt establishes very simple quantitative criteria through which we can find those good companies that are cheap. In reality it is only two factors:
Greenblatt prefers this ratio over the most common ones such as ROE or ROA for various reasons. The most important is that EBIT makes it possible to compare operating profits between different companies without the distortions derived from the differences in tax rates and taxes.
On the other hand, the use of tangible capital as a denominator. The reason is to know what capital is really necessary to carry out the company’s business (tangible capital excluding goodwill).
Better known as Multiple Acquisition, Joel Greenblatt uses this metric instead of others better known as the PER or the P / BV because to calculate the price-profit ratio taking into account the net debt, since the other metrics are influenced by variations in debt levels and tax rates, while EV / EBIT does not.
Applying this strategy in the market Joel Greenblatt has been able to obtain spectacular returns for many years getting an average annual return of 30.8%, but how to work with those ratios and select the companies that meet them to create our portfolios?
For this it is necessary to have tools such as zonavalue.com that allow us to track the market in search of these opportunities. The good news is that once you have them, the question is really easy.
The procedure of investing with the magic formula consists in selecting a portfolio of between 20 and 30 shares that meet certain requirements and that according to Greenblatt should beat the market in the long term. For this, all the companies in the market are ordered according to two criteria:
Keep in mind that the magic formula is that it is a ranking system (classification), not a filter (excluding). This means that you select companies in a relative way. It does not decide which companies are good or bad, but which are the best and which are the worst.
Joel Greenblatt has an estimated net worth of 500$ million. Most of his money comes from his magic formula but also from the Value Investors Club and Gotham Capital, which is a hedge fund.
Joel is well known for his philanthropy work. He donated over 2 million dollars to the P.S. 65Q which is an elementary school in Queens.
The investment secured a 1000$ to each student over a course of five years, and most of the students are from South Asia and South America.
He is also a founder of the Master Player Portfolio with Purpose which is a sock trading contest. Not a lot of information about his personal life is known, and he likes to keep his life private.
Full name: Joel Greenblatt
Date of birth: December 13, 1957
Birthplace: Great Neck, New York.
Profession: Founder of the Securities Auction Corporation and the chairman of the Alliant Techsystems
Weight: 60 kg
Net Worth: 500$ million