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Uh, the more you know, the less hard it is to stick with it. The less you know, the more you're at the mercy of just emotion. And I I guess that's really the secret. In this episode of Wisdom, Wealth, and Wellness, host Jonathan Satovski interviews renowned investor and author Joel Greenblat. They discuss Greenblat's value investing strategies, the importance of patience and discipline, and the behavioral biases that challenge investors.
Uh welcome. Uh this is Jonathan Satovski. Uh this episode of Seeking Wisdom, Wealth, and Wellness. I have a guest that has been uh probably doesn't know it, but he's been a mentor to me. He's been uh just a wise soul, brilliant investor, just high EQ, high IQ, and uh just packed with just worldly wealth of wisdom, and I'm grateful to have him.
Uh welcome Joel Greenblat. A little background on Joel. Um he uh started his fame I think uh investing a small sum of money about $7 million turning it into a billion six if I recall in a short 10ear span uh and has been a professor not quite but that sounds so you know you can say that that's pretty good yeah Colombia value investing uh professor and uh has written many books uh you could be a stock market genius uh the little book that beats the market, the big secret for small investors, um, common sense, you know, and he's just very philanthropic, very giving with his time and his wisdom and oh, I'm just so excited to spend time to to uh to expand on uh some of some of the lessons that I've learned over the years.
Thanks for uh thanks for spending a little time with me. Good to see you. So I I'd start with um you had written um this great book um you could be a stock how to be a stock market genius great title of course and it was a lot about idiosyncratic ideas and uh really fascinating and then you evolved to the little book that beats the market with this simple formula you know buying cheap profitable companies.
So the question is why does it work and why don't more people do it since it's so easy, so logical and easy? Are you talking about the second book? Why does it work? Yeah. Yeah. Yeah. Yeah. Yeah. I mean uh it's a good question. I think the biggest reason is is that the only way you can buy something cheap is that uh people don't like it.
Okay. For some reason. And so that's hard to do. And uh usually uh there's a there's a lot of ways to make money being a contrarian. Uh I think the the method in the little book that I sort of half jokingly called the magic formula. Uh you know, buy good business cheap. Uh really what I think people are thinking is that it's earning a lot of money now but next year or two won't be quite as good and that's why you're getting this bargain and when people are trying to make money in the short term uh they're their happy hunting ground is not companies that are not expected to do quite as well in the next year or two and they systematically avoid those companies and but if they're still good businesses earning high returns on capital uh these are usually short-term problems.
uh and you can take advantage of those. And the important thing about that kind of investing is that it's very hard to cherrypick which companies, you know, are not going to continue to do badly or whatever. But on average, it is a very good bet to say that on average um buying these uh high return on capital businesses cheap uh relative to their cash flows uh on average works.
It's like an insurance bet. You don't want to take one of them. You but you pretty much know how your average is going to come out. So you want to do thousands or you know tens at least in the in the stock market and you want to get the a average is good. Cheap and good average returns are very good.
But you gave it away. It's kind of interesting because you originally gave away the formula on a website said here here's the formula. Go do it. Do it yourself. Go. Good luck. Have a good time. And I know myself I started using it because I thought it was like really clever and wonderful. And then you know you wrote about this that basically people couldn't stick to it.
People had a very difficult time adhering to the persistency of the process over time. Why why do you think that is? What what's what's what's the human flaw? Oh because we live it's a good question. But I mean we live dayto-day, you know, we we look at the paper every day or we look at our computer screen nowadays.
I'm aging myself, but uh and and see the prices and uh even in periods where the formula did incredibly well, 10 year periods where the formula did very well, there were several, you know, threeyear plus periods where it did poorly, yet it did really well for the 10 years. And people's time horizons are uh I think Jeremy Grantham put it best.
It says, "My very best investors, their time frame is 3.0000 years." So, uh, that's considered long-term in the stock market, but in real life, it's it's not at all. And, uh, it sometimes it takes a lot more patience than that. And, and I understand that it's it's much easier for individuals to withstand because they don't have clients who call up every day and say, "Hey, what's going on?
I, you know, I underperformed the market last year. I lost money or lost more than the market or whatever it might be." That's very hard to do. And I totally empathize with that. That's just the way it is. But if everyone could do it as John was suggesting, you read the book, you follow the thing, and it was easy to do, then of course it would stop working.
So that's the only saving grace that it's really hard to do. In real life, it's really hard to do. Almost no institutional managers can do it. They they're uh you know, I was on a lot of big pensions and you know, think of uh not pensions, uh endowments. Endowments are perpetuities, meaning no one's dying.
You know, it's it's there forever. And so they should have the longest investment time horizon of anyone, even more than a person. But there is a person who allocates to US equities or bonds or uh private equity or whatever. And there they have a benchmark and it's seldom more than three years. So uh there's an agency problem there.
And even the biggest places that should have the longest time horizon don't. And so who has the biggest advantage? Individual investors. But as you pointed out, the individual investors even given it. Here you go. Do it for free. You can't do it. So the the lesson that I took away and it's really had a profound impact on my perspective and my my lessons is trying to remind people, look, if you're not going to buy something with the Buffetesque idea, like ignore it for 10 years.
Don't bother. like don't even bother getting involved because you know whether you use the formula or even using Birkshshire as an example or I think you gave the example of CGM focus during the 2000 to 2009 period 40% of the time it would under most even the best performing investments or investors are going to underperform by magnitudes of 20 to 60%.
And it's not that it's not going to happen. It's you need to have that emotional fortitude to know that that's going to happen and to be able to persevere through those periods of pain in order to you know benefit by the riches over that 10-year period. And that's that's I gosh I wish I wish I can like remind people of that thought daily every single day because it's been it's been tremendous.
CG the CGM example you brought up is the single best example I can think of. You know, the market was flat for that uh 10-year period. Uh but that fund was up 18% a year. Uh but the average investor in that fund lost 11% a year on a dollar weighted basis by moving in and out all at the wrong time. In other words, to beat the market by 18% per year, which is incredible.
Uh you have to do something different than the market. Your returns are going to zigzag differently. And people were actually able to pile in. Every time it did well, they piled in their money. And every time it did poorly relative to the market, they piled out. and they managed to turn that 18% annualized gain when the market was flat to an 11% dollar weighted loss per investor.
So that is like the single best analysis. People uh follow returns and they put money into funds or put money into the market after it's done well. And I'm not making fun either. It's really really hard to do. But if you don't understand that point that that's the way it works, you have no chance. So at least telling people that this is what's going to happen gives you a chance to do it.
And you have to know yourself. And there are very few people who can withstand the pressure of way underperforming for a period of time. There just are very few. And if you think you're you can be one of them, you have a chance. But as you know, most people aren't going to beat the market unless or or do as well as the market unless they understand what they're doing and they understand the perspective that they need to have to continue to invest.
So that that uh I think that's um anyone that wants more details on that. The the big secret for small investors is about this topic. I think if I recall, well, the big secret is patience. Still a big Yeah. You have to read the book. That's all you need to know. just patience. Just skip skip the reading.
So, um yeah, I I think just piling on that, I think Vanguard shows that even people that buy the S&P 500 don't do as well as the S&P 500 because they can't even behave in that way. But anyway, so what behavioral biases would you do you use for yourself or family or friends or people you love? Or do you think that people are just wired with that disposition or not?
Is is there things that someone could do uh you know like strap people to post like Ulisses? like what can what can what do you do or what habits have you done? Take a walk with the dog when you're frustrated or you know like what kind of things would you recommend for the people that you love to to protect them from themselves?
Yeah, usually when things go bad I hide under my desk. That's my No, I I would just say I'm human and I've made I guess what's good is if you have a plan and you know a process and you know to invest in stocks, you really have to know how to value businesses. You don't have to be right all the time, but you have to know how to value businesses because that's what stocks are.
They're ownership shares of businesses. So unless you're going to do a portfolio like uh you know diversified portfolio and maybe have a systematic process like I outlined or put into an index fund or something of that nature uh you have no business investing uh in individual stocks because unless you know how to value businesses.
So that's one of my skill sets that I learned. I went to school a long time. I studied it. I enjoy it and I'm decent at it. I wouldn't say I'm great, but I'm decent at it. And I'm very disciplined. So, and I know I'm going to be wrong sometimes, but I leave a large margin of safety between what I think something's worth and what I pay for it.
And even when I'm wrong, maybe I don't lose much or maybe I don't lose anything. Maybe I make a little, but not as much as I hoped. Uh, and so you have all those concepts in mind when you're picking stocks. And over time, I think we're pretty good at it. And the more I know something, the less upset I get when things go against me.
Because when you think about it, unless you bottom tick a stock or fond even or the stock market, unless you get the exact bottom, it's down after you bought it every time. It's almost like you never bought a tick. So every time you buy something, it's down from where you bought it. That's just the way it is.
And you have to understand that. And you have to be ready for that and understand that's the way it works. And if you really like something, I I mean you you learn certain things, but one of the things that I learned is, you know, uh when I buy something and it goes down and I get excited because now I can buy more at a lower price, then I know I really uh have faith in what I'm buy uh you know what I my analysis and that's really been my best investments.
when I bought it and it goes down and I'm just thrilled because now they're selling it to me at a cheaper price and I can and I still like it just the same. So, uh, the more you know, the less hard it is to stick with it. The less you know, the more you're at the mercy of just emotion. And I I guess that's really the the secret, but no one avoids the emotions of investing.
It's very volatile and it's uh a lot of it's uncontrollable. Uh you know, you can call the stock market a complex adaptive system, meaning you know, it eventually gets a right, but it's a really noisy ride and you just have to be ready for that and it's hard to do. You you had uh I remember you were talking about people getting lucky, you know, like not following a process, you know, like it's like someone running through a dynamite factory with a lit match, you know?
I like that. may live, but you're still an idiot. So, it's like, oh, I'm a genius. Look, I made a lot of money in the stock market. They don't know why, you know. So, I'm curious about your process, you know, because obviously a lot of your work is quantitative. How much do you take some qualitative?
I know you it's maybe not emotional, but how much qualitative or feel to your point that you you know, you were given the example when something drops that you're you feel good about adding to it. It's like there is something qualitative there because you're not in that example, you're not purely using quantitative metrics unemotionally.
You're thinking about the business on a more on a more um sure, you know, more thoughtful. Yeah. If I'm doing concentrated investing and really picking individual stocks, then I I have an opinion of where the business is going to be and I'm not looking at what they just earned last year. I'm looking at what I think normalized earnings are a few years out.
So, I'm either right or wrong on that. So, it's not a question. And as Buffett would say, uh, price and value are, uh, uh, sorry, growth and value are tied at the hip. Meaning part of valuation is growth. Meaning, how much are earnings going to grow? That that factors into how you value something. So there is no grow growth investing.
There is no value investing. There's investing. Figure out what something's worth. And what something's worth has to do with how much earnings are going to grow over time. So there's no dichotomy there. uh there's no reason to struggle with which way should I go or they're the same thing. They're the same thing and growth is part of value.
I would say that uh very early on, thank God, I read not just Benjamin Graham, which was figure out what it's worth, pay a lot less, leave a large margin of safety, but his best student, a guy named Warren Buffett, said if I can buy goodness, good business cheap, even better. And a good business is your friend.
the wind's at your back. So, let's say you uh you think something's worth $10 and you can pay uh $5 for it. Sounds cheap. But if the business isn't great and that $10 is at risk, maybe it goes down to eight or seven or whatever it might be. Is that as good a margin of safety as something you think is worth $10 now and you're paying seven for it, but you believe that $10 is going to grow over time?
You know, which one has the larger margin of safety? I could argue the second one actually has a larger margin of safety even though the current discount uh isn't isn't quite as big if you're in a business that reinvests its money at very good rates or just can grow its business because it's in a great field and it doesn't need a lot of capital.
It's asset light. I mean there's a lot of scenarios in which that could work much better and you have to know what you're looking at and I think um just knowing as as Buffett would say your circle of competence. If you know how to do that kind of stuff, great. If you know what kind of business you can evaluate, which ones you can't, great.
If you know, look, I should be an index investor because I'm very emotional and I can't under I mean, one thing you get from index investing is that you don't underperform. And so, it's not just losing money, right? Uh, if you're an active manager, there's two ways you get shaken out. You lose money because the market goes down and you went down, too.
Or you underperform. Market went up, you went up less with an index fund. Yes, market goes up and down and and you do stupid things, but you do less stupid things because you don't underperform. So, uh you have less mistakes to make. And if you know yourself and you know that that's better for you, uh you don't have anyone advising you that can you trust uh that does good work, then you know, maybe that's the best for you.
There's no oneizefits-all and there's no one size fits the entire portfolio. Uh there's sections of the portfolio that are good for different parts. H how has your process evolved over time? I mean, you've been at this a long time and you know, as you started, you were doing really cool idiosyncratic spin-offs and a lot of other things and um have things changed sort of like how Buffett and Munger have had to change because of either time in what's happening in the world or because the size of the of the money that they were stewarding, you know, how have you had to evolve the way that you've thought about things or adapt some of your processes because of that?
Well, I actually I taught at Columbia for 23 years and I actually got to take one of my classes to visit with Buffett and uh he handed me his fat wallet. Uh and uh you know, he has a saying, a fat wallet is the enemy of uh high investment returns. And when Buffett first got started, he was doing special situation investing.
And that was probably his highest returns of all time. And then when he had the problem having tens of billions of dollars, very hard to invest in special situations. There's uh not as many. and and you can't really allocate that kind of capital to that area and find little nooks and crannies that are uh opportunities.
And the good news, I told my students all these years is well, you know what happens to people who are good at that? They get too much money and they have to do something else and now it leaves a window for younger people to make their fortune that way. Uh fortunately or unfortunately, I never had the type of money or problems, let's call them problems that Buffett has of the too fat a wallet to invest in special situations.
It was more that I did something for 25 years. It was very interesting. I would teach anyone to do that. I would suggest people if they're interested in it to do that. Uh I think it's a great way to invest. Still is a great way to invest. Still a great way to get started. Still a great way to finish.
And I could be still doing that because my wealth is not fat enough to keep me from doing that. But uh I like the basic principles of investing and and a way to apply those principles is in a more diversified portfolios. We do long only, we do long short, and we apply those same principles that way on a very systematic basis.
And they're both full-time jobs. So, the reason I switched was just because I couldn't do both, and I had already done one for a long period of time. Enjoyed that, and I wanted to try something else and and enjoyed that. Took me on a little journey. Both of them did. And uh I still do a little bit of both, and uh it's kind of fun.
But uh the the diversified long short investing is really a full-time job. And so I'm I'm doing mostly that. And uh some of my students or my kids that I've taught uh you know keep my my finger in the in the game of special situation investing and and so I enjoy that and I enjoy just talking. That's great.
Do you do you know the long short uh idea is actually uh you know we're we're I don't know when this podcast will air. were generally delayed, but we're now in June of 2023 doing this podcast and the uh the philosophy uh of the long short uh strategies have been to be long, cheap and profitable companies and short unprofitable companies, you know, expensive and unprofitable companies, which is beyond logical and and reasonable and and particularly I don't know if it there's periods of time where that they're more extreme stretches of of those situations, but it seems like the last couple years, you know, should be setting up really nicely for that ideology.
Do you feel like it's more pronounced at this moment in time than it's been in a while where that you get more excited? Wow, the extremes are stretching, you know, better for me. Sure. Well, in the little book uh that you mentioned earlier uh and we still have 30-year study, you know, updated till today where it shows that if you just buy good and cheap um and you divide into desiles over a 30-year period, uh decile one, the best combination of good and cheap beats two, beats three, beats four, and the 10th meaning expensive or losing money and and uh and not good, you know, not earning money uh is the worst.
However, if you literally put a dollar into the top decile and shorted the bottom decile uh during those 30 years and you just did a dollar for dollar, you would have gone broke two or three times because over time it it's true it works. But in the short term, you know, if you went a dollar long and a dollar short, uh your longs may be, let's say, a 0.5 beta, your shorts may be a five beta, and you're really 10 to one short.
And so there's there's, you know, 30 things you really have to balance and you want to you it might be totally skewed into different industry groups. There's a whole bunch of reasons why there's a real art to balancing those portfolios and you cannot go long short and buy the and short the extremes.
You would never do that or you wouldn't do it for long because zero doesn't compound after, right? If you lose all your money, you can't, you know, compound off that. So you would never do that. It's it's great example to show that if you're very patient on both sides or one one's a bad strategy longterm and one's a good strategy but as a long short strategy it's totally different.
You have to balance them along the way or you'll never make it through. So it's great as an illustration not great as a strategy and the the long short strategy uh I would put in the category of do not try this at home. uh and uh you you know just as you have to live through uh good and bad periods just being long only in long short world is the same and and answer your question yeah it's a great time uh the opportunity set is really great uh for long short investing the way that we do it because uh the valuations are uh very skewed right now doesn't mean it'll happen in the next six months but over the next two three years it's almost a certainty uh that this will correct once again don't try long short investing doing it but I would just say it informs the way you know where the opportunity sets are at least on the long side and also should set your expectations for each group at this point one is very very expensive one is very very cheap uh and I'm most excited about the long only version of the very cheapest are really skewed.
I'll give you one small example. We ran outside money from 1985 to uh the end of '94, 10 years, and returned all the outside money after that. Continued to run our own portfolio and uh in '98, so it's 13 years after we started. We had our first loss year uh you know, just running a a concentrated portfolio at that time, but the market was up 28% in 1998 and or 27, I don't remember.
But we were down five. I remember that. And very tough year for value investors. Yeah. Very hard to do that. And then in 99 uh market was up another 21%. We were down five again. In 2000 the market finally fell was down about 10%. We were up 115%. It wasn't it wasn't because we were idiots in 1998 and9 and all of a sudden geniuses in 2000.
It's just that we followed a process and we finally got paid. But that's an ugly journey and uh very hard to do and you know but a great example just thinking about those numbers how skewed the market can get and you know if you really do your homework and and at least stick to what you know and have a process uh I I don't think we're anywhere skewed like that now by the way that's that's not going to happen that that is hopefully a once in a-lifetime uh skew.
Uh but you know things rhyme and right now we're not nearly as extreme but we are uh towards the the ends and and so I I I agree with you. I I think there should be a very good opportunity. It's kind of funny because I I remember that period vividly and I remember John Marie Evard saying that he would come home every day and his wife would say you know he would feel like an idiot you know in the late 90s but he was you know he was he was I do that every day but that's okay.
Um yeah, interesting. So um question around the idiosyncratic stuff that you've been involved in, you know, when you wrote that original book, I know um uh I I I vaguely recall you telling me that at one point in time like one of your best investments that you ever made was investing in with a in in backing one of your friends that got into the investment business, Rich Pina and Pazina investment management.
that might have been one of your best investments. H how did you how did that come about and you know what what compelled you to make a decision to invest in another asset manager? It's kind of interesting. May maybe an interesting story for some I don't know interesting but I went to school with Rich at Wharton and uh we actually did a research pro project together uh testing and it ended up getting written up in the journal portfolio management but it was testing Ben Graham's stock picking formula and back then you know computers took up you know football field and uh databases consisted of us taking a pencil and standard por stock guides and writing down the information that we wanted to put into the computer.
Uh, and so this was a big long project and turned out, you know, what Ben Graham had done 40 years earlier still worked and it worked incredibly well. Uh, and we worked on that together and I knew Rich, uh, from schools, the smartest guy I knew at his school. And so, uh, kept up with him. He was running Sanford Bernstein's US equities.
And he said to me one day, "Gee, I'd like to at some point go out on my own." And I said, "Well, if you ever do, I'd love to back you." I mean, it was one of the easiest decisions I ever made. and he's really one of the highest quality, smartest, nicest people I know. So, I mean, it really was just kind of easy.
Not you don't get that opportunity too much in life. Just that was like an easy one. They don't throw you pitches like that ever. And uh, you know, it's been fun ride and you know, I love Rich to death. That's a good win-win. That's a good win-win story. So, uh, couple like last last closing uh, questions.
you you've you've published many books. You know, I I I believe you're a pretty avid reader. Are there any books that you've read recently or that you're reading or you would suggest to uh to uh to someone at different stages of their career or their life that they should pick up and read whether it's about investing or life or psychology or behavior or cabala, you know, like what what uh what do you found most uh striking to you these days?
Um, that's a good question. I mean, besides the usual investment books, uh, I I am, you know, of course you're asking me the question or I'm blanking on some of the names. Uh there was a one of the funniest books I I remember reading I was just thinking about it the other day was uh a book um written about uh let's see oh I think it was called the only a rule is it has to work and it was about these guys it was like a moneyball type book that uh was really kind of funny because these guys had no money and uh they took over a minor league team that was like nine levels below MLB and they tried to you know coach people who had been good in high school to go play on their team and things like that you know using all the analytics that you usually would and it it actually uh was really more of a discussion of how people aren't statistics and you know it's sort of the collision of human beings and analytics uh messing up, you know, the best late plans and it was a little bit hilarious uh about how it all went, you know, or how it all went.
I don't want to ruin the book, but I don't think anyone else read it. Uh so I thought that was uh a really fun book. Um, I'm try I'm trying to uh think of what else I uh let let's see what I could recommend to people. I I would say any biography of uh Benjamin Franklin. Uh, I've probably read at least three or four and I think the most motivating, interesting, and just seeing what how interesting one lifetime could be, but also just the way he he thought.
And I and I think uh any good rated uh biography of Ben Franklin would be my probably almost my number one recommendation. Oh, I love that. Um I love that. And so love that. you know, I I like reading usually non-fiction and there's always uh something out that I'm enjoying, you know. Well, I I'm I'm super super grateful that uh that you spent the time with me today.
How how would people find you if they want to um read about you, learn learn, you know, um go to gothamfunds.com? What's the best uh I would uh best place to get information? you know, I really learned not from business school because they um taught me don't go into the professional money management business pretty much, you know, markets were efficient.
Uh but I learned from reading and so I wrote books and so go to Amazon and you know, I'm proud of almost everything I wrote. You decide what I shouldn't be proud of if you read some of them. Uh, but I had fun writing them and and it was my way of uh having fun and giving back. And so that that's really the best way to uh learn about the evolution of of how I've thought about investing be for good or bad.
And and you know, I'm proud of most of them. And you know, I think you can learn something from each each thing that I wrote. So you know, and and it was my attempt to to give back something. Well, you've done a great job. I I know I've I've benefited immensely and I know that anyone that is lucky enough to pick up any of your books is going to is going to glean something that will contribute to their uh to their to their wealth, their wisdom, wealth, and wellness over time.
Uh I'll leave you with one last thing is if you had an alter ego, a career path, uh a road unsurprising uh something untaken, what what would what would you be doing aside from investing? Oh, I probably would have tried I don't know if I could have been successful as a research scientist. uh you know uh stock market's more in the social realm and you know you're not always it's not linear and you don't necessarily get paid off what you're deserve but the natural world kind of has like great secrets that if you uncover them you those are truths and I think it's also a way to give back and do something fascinating and you know I've met enough research scientists that I respect that it's very hard to do that but also that's what I would have done I would have pursued hey Grandma Moses started painting at 80.
You know, you never know. You still got a long journey ahead. Uh well, you know, good luck with that. Maybe I'll paint. Okay. Well, thank you again, Joel. I uh appreciate the time and uh look forward to seeing you down the road. Thank you. Satovski Asset Management, hyperpersonalized wealth management that has created joy and abundance since 2007.
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