Crack Value Investing: Master Joel Greenblatt’s Magic Formula

Joel Greenblatt, an American academic primarily involved in investment fund management, is also renowned for his contributions as a writer. Serving as the chairman of the board of Alliant Techsystems and the founder of the New York Securities Auction Corporation, Greenblatt has made significant strides in the financial realm.

joel greenblatt magic formula
  • Name: Joel Greenblatt
  • Birth: December 13, 1957.
  • Known for: Major representative of value investing strategy (value investing).
  • Notable works: “The Little Book That Beats the Market”

Biography of Joel Greenblatt

Joel Greenblatt was born in Great Neck, New York, in December 1957. He pursued his undergraduate studies at the Wharton School, University of Pennsylvania, graduating with a Bachelor of Science degree with summa cum laude honours in 1979.

While at Wharton, he also earned his postgraduate degree (MBA) in 1980. Subsequently, he embarked on legal studies at Stanford University but redirected his focus to his professional career after a year.

In 1985, Greenblatt made a significant step by founding Gotham Capital, a hedge fund that started with an initial capital of $7 million. A substantial portion of this capital was contributed by Michael Milken, a well-known investor associated with controversial junk bonds.

Between 1985 and 1994, Gotham Capital achieved an impressive annual return of 50%, netting a 30% annual return after accounting for all expenses but excluding manager incentives. The hedge fund concentrated its investments on companies undergoing unique circumstances, such as spin-offs or restructuring processes. This approach allowed Gotham to invest in undervalued firms with the potential for revaluation.

In 1995, Gotham Capital decided to return all external capital, continuing to operate as a hedge fund but closed to external investors until 2009.

In 2000, Greenblatt played a pivotal role in the establishment of the Scion fund, aiding investor Michael Burry with a one-million-dollar contribution (acquiring a 25% stake). By October 2006, Gotham's investment in Scion had reached $100 million.

In 2008, Greenblatt founded Gotham Asset Management as a successor entity to Gotham Capital. This firm offers diverse investment products, including mutual funds, ETFs, private funds, and separate institutional accounts. As of April 2023, assets under management totalled $3.55 billion, according to hedgefollow.com.

👉 Read more about hedge funds ; investment funds & ETFs

Beyond his investment pursuits, Greenblatt serves as a professor at Columbia University, imparting knowledge to MBA students at the Graduate School of Business.

In 1999, Greenblatt founded “The Value Investors Club,” a website where an exclusive group of value investors, subject to high admission standards, shares ideas and perspectives on the market. The club awards a bi-monthly prize of $5,000 to the investor offering the best advice. As of April 2023, the club boasts 500 active members, with only 1 in 15 admission applications approved.

Joel Greenblatt magic formula

Joel Greenblatt, a notable value investor, is renowned for his well-known “magic formula.” In his capacity as a writer, he has authored four books, which are highly recommended books for trading:

  1. “Market sense and nonsense: how the markets really work (and how they don't)” (2012).
  2. “The big secret for the small investor: a new route to long-term investment success” (2011).
  3. “The little book that beats the market” (2006).
  4. “You can be a stock market genius: uncover the secret hiding places of stock market profits” (1997).

Beyond his contributions to literature, Joel Greenblatt is acknowledged for his support of education in New York. He has generously made donations to schools in Queens and Harlem.

Furthermore, Joel Greenblatt has actively contributed to the fight against cancer, collaborating with Robert Goldstein and Gary Curhan. Together, they awarded a prize of 1 million dollars to research this disease. The recipient of the award in 2008 was Alexander Varshavsky.

Investment philosophy

Joel Greenblatt adheres to the value investing philosophy in his investment approach, focusing on identifying exceptional companies trading at a lower price relative to their intrinsic value. To implement this strategy, Greenblatt devised what is commonly known as the “magic formula.”

👉 Get more information with our fundamental analysis guide & how to calculate ratios of companies

In his publication, “The Little Book That Beats the Market,” the academic elucidates the two components of this renowned formula and how he applies it in his investment decisions. The initial element involves finding stocks trading at a discounted price, using the earnings per share to price ratio.

This method entails identifying companies with robust profits in relation to the share price, aiming to select those offering a favourable balance between earnings and share price. Once companies with reduced stock prices are identified, the next step is to discern those that constitute sound business prospects. This involves evaluating the return on assets (ROA). A company demonstrating commendable earnings relative to the cost of its assets possesses a greater capacity to reinvest profits, thereby generating increased value and profitability.

In summary, Joel Greenblatt utilises the “magic formula” to identify companies with strong business fundamentals that are trading at discounted prices. By capitalising on this situation, he aims to invest in these companies and secure favourable returns.

In 2009, the American academic founded Formula Investing, a money management firm, adopting the “magic formula” as its investment strategy. Through this patented system, the company specialises in overseeing and administering value portfolios. Additionally, Formula Investing provides management and advisory services to both individual and institutional investors interested in leveraging this formula.

What are some of Greenblatt's successful investments?

Joel Greenblatt's investment philosophy centres on identifying certain “simple” businesses that present opportunities for successful investment. His criteria involve seeking out high-quality companies characterised by strong brands, sustainable competitive advantages, and low levels of debt. According to Greenblatt, investing in such companies can lead to above-average returns over the long term.

Joel Greenblatt's magic formula example

One of Greenblatt's notable successes was his investment in Marvel Entertainment in 2009. During this period, Marvel faced financial challenges, burdened with substantial debt and limited assets. Despite the company's predicament, Greenblatt recognised the potential of the brand and believed in its capacity for a turnaround. His foresight proved correct, as Marvel successfully reversed its fortunes.

Among Greenblatt's other triumphs are investments in companies such as Children's Place (PLCE), Groupe Danone (BN.PA), DuPont (DD), Sealed Air Corporation (SEE), Hertz (HTZZ), Getty Images (GTY), and Toys “R” Us. In each case, he achieved significant profits for his investors by identifying companies with considerable potential and facilitating their growth through strategic guidance and operational enhancements.

Summary

Joel Greenblatt, a prominent figure, one of the best investors in the world, employs his “magic formula” to identify undervalued yet fundamentally strong companies. His successful investments, including Marvel Entertainment, Children's Place, and Getty Images, attest to his philosophy's efficacy.

Focused on businesses with robust brands and low debt, Greenblatt achieves above-average returns. Additionally, he founded Formula Investing in 2009, a firm dedicated to managing value portfolios and offering advisory services based on his proven investment strategy.

His innovative approach to value investing and his creation of the “Magic Formula” investment strategy stand out as significant contributions to financial literature and practice. Similar influential figures in the investment world, such as Warren Buffett with his focus on value investing and Benjamin Graham, known as the father of value investing, also share Greenblatt's philosophy of seeking undervalued stocks with strong fundamentals. These individuals collectively have shaped modern investment strategies through their teachings and investment practices, offering valuable insights to both novice and seasoned investors alike.

More Biographies

FAQs:

How did Joel Greenblatt develop his “magic formula”?

Joel Greenblatt formulated the “magic formula” by combining two key factors: earnings per share to price ratio for identifying undervalued stocks and return on assets (ROA) to assess a company's fundamental strength.

What is the significance of sustainable competitive advantages in Greenblatt's investment philosophy?

Sustainable competitive advantages, such as strong brands, play a crucial role in Greenblatt's strategy as they contribute to a company's long-term success and are factors he considers when identifying potential investments.

Can beginners apply Joel Greenblatt's investment philosophy without extensive financial knowledge?

Yes, Greenblatt's approach is designed to be accessible. While a basic understanding of financial principles is helpful, his “magic formula” simplifies the process, making it feasible for beginners to identify potential investment opportunities.

.

Related Articles