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Today's investor became known as the creator of the magic formula that finds the stocks with the greatest potential for long- term profitability, but Joel Greenblatt is much more than that. In today's video, I'll show you the other side of the story that nobody talks about: the wisdom, the knowledge, the value tips, how you knew how to navigate the market.
And who is Joel Greenblatt? He's a sailing instructor, he also invests, he's a manager at Gotham Fans, and he's also the author of the book "The Mockers," which is the book I'll be discussing today. First, a fundamental point: you must be diversified enough to survive bad times or bad luck so that your skills and good investment processes have a chance to bear fruit in the long term.
So, when you invest, some setbacks happen. Your investment process may be very good, your methodology may be very good, but at some point, a bad luck streak occurs. It's normal, and diversification prevents this from happening. And you're seeing Joel Greenblatt's updated portfolio on the screen; he really does what he preaches.
Second, stock prices move uncontrollably in short periods. This does n't mean that the value of companies has changed during the same period. In the short term, there are countless news items, noise, negative repercussions, gossip—in short, all of this affects the price of a stock in the short term.
But just because the fluctuation is high doesn't mean that businesses are also fluctuating. The new pattern you're seeing is a strong market at this level, so it goes from exuberance to panic, and only for a short time does it remain cautious. Thirdly, maintaining a three- to five-year timeframe for your stock investments offers a great advantage over other investors.
35 years is the minimum timeframe for any meaningful comparison of the risks and results of an investment strategy. So the minimum timeframe is three to five years. You'll see the minimum timeframe in the following points; here, you can even set a longer timeframe when defining your portfolio allocation.
In the diagram, you see short-term variations on the left and long-term variations on the right. You notice that in the short term, volatility is high, but in the long term, if the investment is good, the trend is growth; the fluctuations are smaller. Fourthly, in the long term, despite significant drops from time to time, stocks will be one of your best investment options.
The trick is to focus on the long term when making your portfolio allocation. Always think five, ten years or more. Yes, bad times will come, but in the long run, good times will prevail. And this graph you're seeing on the screen, small in size, I'm going to enlarge it now, including bonus content.
This graph isn't in the book, but I brought it to you to show an important point here in your long-term growth strategy: how much of the return on stocks in the long term comes from dividends. Reinvested dividends are responsible for 75% of the return on stocks. SBT was a geographic champion (shown in green) compared to non-investment ( shown in blue).
So I'm giving you this bonus content precisely so you don't forget the importance of reinvesting dividends in this initial phase of wealth accumulation. Fifth point: there are two things you need to know about risk: number one, what is the risk of losing money following such a strategy in the long term?
And number two, what is the risk of such a strategy performing worse than the alternative long-term strategies he's talking about here? You have to think about the possibility of losing money on that investment. If that investment could reach 0 (this is the worst-case scenario that takes into account the worst-case scenario).
Although this scenario is unlikely, you need to know the maximum you can lose on that investment. A second point you always have to keep in mind is that even if you were investing in another strategy, you also have to consider this when calculating risks. Of course, no risk calculation method is 100% perfect, but it helps a lot when building your portfolio.
And this is a rather controversial phrase: buying stocks without the slightest idea of what you're looking for is like running into a dynamite factory with a lit match. You might survive, but you're still an idiot. This phrase from the game England is actually a bit more offensive, a bit more controversial, but it's still true because if you don't know what you're looking for, investing in stocks makes no sense.
After all, a minimum of knowledge will provide a little security, but when you have a lot of knowledge about what you're doing, it gives you much more peace of mind, much more seriousness, much more security. In summary, companies that have a high return on capital probably have some kind of special advantage.
This advantage prevents competitors from destroying their... The ability to generate above-average profits, but what exactly is that? I've prepared a step-by-step guide for you to learn everything, so let's go: how to calculate return on invested capital. This high return on capital, when it's a fair game, is something everyone talks about.
So, the first point is this return on capital: it's the EBITDA divided by the capital stock. You've been following this for a while, you know it's the company's operating profit, the operating result before interest payments, before taxes, already including depreciation and amortization. In step number two, it's current assets minus current liabilities - cash and cash equivalents.
This doesn't include intangible assets or fixed assets, only the assets that are actually used in the company's day-to-day operations. So you take the EBITDA, divide it by the capital stock, which I just explained to you, and you'll arrive at the return on invested capital. The higher the better. Do n't worry if you didn't understand this last part, this slightly more advanced part, but if you continue watching the videos here on the channel, I'm absolutely sure you'll learn and master what seems difficult to you today; it will become a piece of cake in the near future.
I hope so. I hope you enjoyed today's video, and here's a video I think you 'll like on YouTube. Rita will enjoy it. That's all for today, a big hug and see you next time!
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