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You're listening to Teip. Hello, everybody, welcome to the Investors podcast. I'm your host, Trey Lockerby, and today I am joined by legendary investor and author Joel Greenblat. Joel is the managing director and co CIO of Gotham Capital, which has produced spectacular returns over the last three decades. He's also the author of investing classics like The Little Book That Beats the Market. And you can be a stock market genius on top of that. He's a professor at Columbia University where he teaches value investing to MBA students.


On today's episode, you'll learn about Joelle's investing philosophy, the case for diversification, as well as the case for a concentrated portfolio. How Joel thinks about position sizing and much, much more. This was a real thrill for me, and I really hope you enjoy it as much as I did. So without further ado, please enjoy my discussion with Joel Greenblatt.


You are listening to the Investor's podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, everybody, I'm sitting here with the man, the myth, the legend, Mr. Joel Greenblat. Joel, thanks for coming on the show.


Sure. Thanks for having me. Trey. So, Joel, I just want to start off by saying that I find your career to be really fascinating and it seems like it's punctuated with these very fruitful yet counterintuitive decisions that you've made along the way, one of which was dropping out of Stanford Law School. So tell us about the day that you walked away from your pursuit of law and what drove you to pursue investing instead. Actually, I was smitt with investing before I went to law school, I didn't really know how to pursue it.


I was in a five year program at Wharton and I was getting an MBA and most people in my position were taking hundred hour week jobs on Wall Street, which didn't look that appealing to me. So I was and I thought that how could it hurt to go to law school? I was good at school. And and it turns out that's not really a great reason to go to law school because I had no intention of ever practicing. I was probably hiding from work more than anything else.


I was running a small fund. I had been smitten with Ben Graham junior year. I, I read an article in Forbes talking about Ben Graham's formula for investing, and I had been learning efficient markets. And at Wharton, none of that made sense to me. I always thought I was looking in the paper and they used to have in the newspaper 52 week high and low. You would see every stock was the lowest 50 and the high was one hundred.


And that was pretty much every stock. And it didn't make sense to me that those prices and all the prices in between were efficient. The business had changed that much in a year. And when I read just a little taste of Ben Graham, then I started reading everything that Ben Graham wrote.


And then from that Forbes article, a light bulb went off, literally a light bulb went off. When I read that article about a little investing formula and describing just a very principle of no, these are actually ownership shares of businesses that you value and buy at a discount. And that turns out to be a pretty good strategy. And the bigger discount you can get, the better investment it might be. And that Mr. Market was pretty crazy at times.


And you could take advantage of that if you knew what you were doing. And all of that resonated with me. And none of the stuff that I had learned in business school at that time was all efficient. Markets made any sense to me. And I read that article, light bulb went off. I read everything about Ben Graham and then off to Warren Buffett over the years. And so I actually started I wrote a paper for my master's thesis at Wharton, updating Graham's formula to see if it still worked with a couple of my cohorts and my friend Bruce Newberg and Rich Bezzina.


And we didn't really have the computers were the size of, I don't know, four large classrooms would be the size of the deck ten computer that Gordon had. And you needed punch cards. And and of course, we couldn't afford a database. So we actually took the old Standard Poor's stock guides and manually went through the A's and B's and collected over a period of eight or ten years data ran it through. The computer was a bigger operation and I'm making it sound and it turned out that a lot would be whole.


Graham's formula still worked incredibly well. We got published in the Journal of Portfolio Management. Our master's thesis said I raised a fund before I went to law school from some of my father's friends to invest that way. And so I went off to law school. But I also had my hand in investing and a lot of my friends had gone off to work already and they seemed like they were doing OK. And once again, I had I figured, how could I lose?


I was at Stanford Law School and and it's good to get that credential. But one day I called up my mother and I'm from a Jewish family. So your choices were doctor, lawyer. And other than that, our head was in the oven and I told her I was dropping out of law school and go to Wall Street. So I found an opportunity. A startup hedge fund man named Al Gore, who is running out Rothschild's arbitrage department, was setting up his own fund.


And I'm an entrepreneur at heart. And I I went join him with a couple of people and I was the only research guy. So it was a great position and took a leave of absence and never went back. OK, so at this point, you're running your own highly successful, highly concentrated fund that's producing 50 plus percent returns every year for the first decade. So, so far, so good. It sounds like every investor's dream scenario. So what's so fascinating is that it's at this point, you decide to payout your outside capital and shut down the fund to outside investors.


Now, I've heard that managing money is as much managing people. So is this what ultimately led you to this decision? No, not actually what I did was I we had done well enough over those 10 years to make enough money and my partner, Rob Goldstein, who joined me in nineteen eighty nine right out of school, I hired him right out of school. We're still together. I like everyone I was working with and my partners were actually excellent.


I mean, most people don't yell at you when you make 50 percent a year, even though we had our ups and downs. And just tell you a little story for the first 15 months after I started got them, we were up one hundred and something like one hundred forty percent. And so I called up all my family and friends and said, you got to invest. You know, we're doing so well and everything else. And of course, the first six months of business, we were down 17 percent after I took in.


All this money is ready to kill myself and nothing to do with my own money, really just paying me to lose money for others. And and we ran a very concentrated book. So every couple of years we wake up and lose 20 or 30 percent of our net worth just because one or two ideas weren't going our way. By concentrated, I mean, six or eight ideas were traditionally 80 plus percent of our portfolio. So not so hard for one or two to go wrong and then to lose that kind of money in a few days.


And that was just part of the deal, part of the deal. Either you got something wrong or the market didn't like what you bought for a day or two. And so for a week or two or a month or two. And so you would you would take those type of draw downs. And and like I said, for me, I knew what I own. So it didn't bother me. It was really the outside investors, the pressure I put on myself to try to perform well for the outside investor.


So, you know, because we were up that 50 percent a year before fees for the ten years we had enough assets on our own to return all the outside money but keep our staff. And so, you know, I loved working with everyone that I was working with. We were able to afford to keep them and then just took some of the outside pressure off of worrying about outside investors was the basic idea. And I'd say it did about half of the job, meaning it certainly took pressure off, but it doesn't take all the pressure off.


Investing is still always a challenge, especially with with a concentrated portfolio. But it definitely, definitely helped a lot. I love the business of investing. And so if I wasn't having the best time possible, you know, after some period of success, you're a little bit crazy to to add more stress to it if you can avoid it. And so that's basically why we did that. So maybe walk us through the strategies a little bit that were around the six to eight holdings that you were holding in the portfolio.


So I wrote a book called You Can Be a Stock Market Genius, which was basically a compilation of war stories for that 10 years. So explaining the types of things we did and some of them were longer term holds, but a lot of them were special situations which could last two or three years. And a special situation could just be a really cheap and it's cheap for a reason. And when you have a concentrated portfolio and you're willing to take big positions because this is always fighting to get into the portfolio and so you're always waiting, what do I own?


And do I like this other thing better? We didn't leverage, but we were pretty fully invested most of the time. So when you found something new and even if you had something that could earn 15 or 20 percent a year and it had this amount of risk, but you saw something, you learn 50 percent a year that obviously if you force rank your positions, you're going to be knocking things out of the portfolio that maybe if you ran a larger portfolio or a more diverse portfolio, you would keep.


And so it was really an organic process based on what the opportunity said. And when you're not running tons of money and you're looking at special situations, they all come about different ways, whether it's a recapitalization or spin off or something new is happening in the business restructuring. They play out over a period of time. And when is at some point people recognize that value. So your rate of return may still be good, but come down a little bit.


So I would say that period of time and that lasted probably over 20 years, really was closer to the way Buffett probably ran his partnership from mid 50s to when he gave his money back in nineteen sixty nine or whatever it was. I think those opportunities are still there. And I think Buffett said, you know, even as late as 10 years ago, whatever he said in the year, he might say in two thousand, he said, look, I could earn 50 percent a year if you had a million, had a million dollars at any time.


And so if you have less money, there's always nooks and crannies that you can find in the stock market. His saying is a fat wallet is the enemy of investment returns. And I once took my class I taught at Columbia for twenty three years and I once took my class out to visit him in Omaha. And as he does with many of his visitors, he actually handed me his fat wallet. So I got to hold his fat wallet. Really hasn't helped him down that badly.


But still, I'm sure he would do a lot better with less money. So another part of the evolution of your career that I find really interesting is that you went from this highly concentrated portfolio to now running a very diversified portfolio and then you eventually open it up to outside capital again.


So maybe walk us through the decisions that led to that. So it came about kind of organically, we were running money for ourselves and we certainly were very buffet ised in the late 80s, early 90s, looking for quality businesses and a little different than where we started with the net net. That was the study we did stocks selling below liquidation value, which is the study I did with my cohorts at Wharton that got published on Ben Graham's stock picking formulas.


But I had always been curious to go and test like we did in business school. This was the early 2000s what strategy we had evolved towards, which is much closer to way by good and cheap businesses, not just cheap off that little twist that made him one of the richest people in the world. If I can buy a good business, cheap, even better. And for years I had I've been writing about it. I had been teaching my students that concept and I wanted to go back and test.


Could I prove that by good and cheap was a good strategy? And so maybe twenty to twenty three. We hired a programmer to just basically do research on good and cheap. And the very first test we ran, I ended up this was not spinning the computer thousands of times to see what formulas might work. We said, hey, let's use a crude metric for cheap and let's use a crude metric for good, which was return on tangible capital.


If you read to Buffett's letters, that's essentially what he's looking for. And let's just wait them 50 50 and let's run a test. That was the very first test we ran and the results were pretty phenomenal. I wrote them up in a book called The Little Book That Beats the Market a couple of years later. And it wasn't a question of, oh, what's the best way to make money? It was a question of the very first inclination we had using a crude database, using crude metrics for cheap and good.


Could we prove and I think that's a lot more proof that that's the very first thing we chose worked incredibly well where you're the combination of cheap and good in the first decile, beat the second Dussel, beat the third test. I'll be it was pretty phenomenal. And I thought, what a great way. You know, I'd been teaching for a long time already and writing and what a great way to share these concepts and make them so blatant to investors that they would take them to heart.


What's not necessarily the best thing that you could come up with to make money. But it was very powerful. It really exemplified a lot of the teachings of Buffett and what I had been trying to convey to my students and and in my writing. And so I thought, wow, what a great thing to share. And so that was the very first test we did, was that. But it also set off a light bulb. My partner, Rob Gostin and I in our heads, as soon as we we call that the not trying very hard method, meaning we just use chroot metrics through database.


And we said we know how to invest. We know how to we don't. We know how to do the work. These aren't pieces of paper to us. These are ownership shares of businesses that we're actually value and we actually know how to value businesses. What if we put a little effort in? Could we improve on this? Said Of course we did and built a big research team and everything else and we really were just building it for us to see if we could put together a diversified portfolio of cheap companies and expensive ones and see if we could come up with a strategy that was also good.


Turned out so good our research that we ended up starting in two thousand nine, taking outside money again. And one of the discoveries we made was that we could actually, following the style diversified portfolios on the long and short side, make more money with a diversified portfolio, then a concentrated portfolio using the style. And the reason for that is that when you have a concentrated portfolio and concentrated, well, we own three or four hundred stocks on the long side in three or four hundred on the short side, choosing from the three thousand largest, let's say we made more money doing that than if we bought our 50 cheapest and shorted our 50 most expensive.


And the reason for that is those become much more volatile. And there are bad periods. If you think back to, let's say, nineteen ninety nine or two thousand, you could really get in trouble just buying the cheapest and shorting the most expensive.


Eventually it worked. But if you're going long, short and put on leverage, that's pretty dangerous. So so one of the reasons why an insurance company would insure five people, no matter what kind of underwriting they do, how much research they do on how healthy you eat and what your stat, your medical stats are, you know, some people step off the curb at a bad time and ruin all those numbers.


And you can tell I don't sell insurance. And and so it turned out that you actually made more money over time with a diversified portfolio. And there's nothing wrong with what I was doing, but with a concentrated portfolio, we were doing that for a long, long time. It was a lot of fun. We were good at it. And this was fascinating to us, you know, running a big research team, following a lot of companies trying to be right on average was another way to make money.


It was a maybe a smoother ride. It didn't come with every two years losing thirty or forty percent of your money. I still teach the other method of being concentrated. I still teach my kids that method. I think it's a great way to make money and they're not better or worse. They have different sort of different strokes for different folks. You know, if you can't take the pain and you're going to have to concentrate, you're going to quit after a bad period, then you're not really going to collect at the end of the.


A day so far, most people don't know how to value companies, I wouldn't say concentrating like that unless you really know what you're doing is a good strategy. So this this is a more widespread strategy for more people, maybe a smoother ride. And, you know, they're both great.


They're both full time jobs to really do a good job drilling deep on just a handful of companies or covering a wide universe of companies. They're both full time jobs. So people ask me this question all the time, which is better or why did you switch? It's just different ways to make money. I was fascinated by one way. For a long time I showed that it could be successful and and then we really were pursuing this more diversified strategy just because it was fun and it was fascinating.


And it turned out when we learned that we could make more money, we actually ended up with higher, slightly higher returns, but a lot less volatility with a more diversified portfolio following the strategy that we it didn't hurt us to take outside money. And it was a very expensive operation because you need a lot of computer whizzes and you need a lot of research people to do the actual fundamental work. And and so it made sense for us to take outside money, but we went about that backwards.


That wasn't our goal. Our goal was to do this for ourselves, also do something different, see what we learned. And all the principles are still the same. Nothing's really changed. Just sort of portfolio strategy. I love them both. And so you are depends how what your risk tolerances are and what you enjoy doing. I would say. And so they're both been fun journeys. I love them both methodologies. I wouldn't read anything into it that we're not doing that concentrate investment.


If I went to start again, I'd go do that again.


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So I want to talk about the research you mentioned because it led me to write this book called The Little Book That Beats the Market or the little book that still beats the market, as it's called. Now, this is one of my all time favorite investment books, and it's the one that I gift out the most to friends and family when they ask me for advice. And it's mainly because you do such an amazing job at distilling down the ideas of Buffett and Graham into just a couple of metrics.


So what's so fascinating about this book is that you back test a screening of stocks using only the return on capital and the earnings yield ratios from nineteen eighty eight to two thousand and four. And the highest risk stocks in this portfolio end up producing a 30 percent return on investment. So just amazing returns. And what I'm curious about is if you've kept up with it, have you tracked the formula since two thousand four and how is it done till today?


I don't have the exact data, but my best guess is that it performed pretty well through maybe two thousand sixty in the last three or four years with the way value that specific formula way value is underperformed would struggle. And the same thing happened really in ninety eight, ninety nine. And there was the hugest reversal of all time in two thousand twenty one, two thousand two. And I always tell the story that I started Gotham in nineteen eighty five and we were always profitable, we always made money.


We had a very nice record but in ninety eight the market was up twenty eight point six percent and that was our first loss here. We were down five percent and we were just long only we weren't shorting stocks, we weren't doing anything like that. We were down five percent. And that's a big difference from the market being up twenty eight point six as measured by the S&P.


Five hundred and ninety nine, Mark was up another twenty one percent. That was our second year of losing money. We were down five percent again. And so pretty discouraging. And I remember teaching at Columbia at that time and I wouldn't say the kids were throwing erasers at us, but I would say that particularly at me, you're out of it. Value investing doesn't make sense everything else. But that's how I felt. And that's sort of how the I think my students were looking at me and I don't think I was projecting.


And in two thousand the market was down nine percent. We were up one hundred fourteen percent. And it wasn't that I think we were idiots in ninety eight, ninety nine and then all of a sudden geniuses in the year two thousand. I think what actually happened was we just finally got paid for all the hard work we did in ninety eight ninety nine finally paid off in two thousand when people decided to value some of the things we were valuing in those businesses.


And so it's a good lesson. I don't think right now. What I would say is I think some of these big companies, Amazon, Google, Microsoft, Facebook, these are great businesses. I don't think we've seen the likes of them before, just the type of franchises these businesses are. For the most part, we have positions in these names, you know, big positions. I think they justify their valuations even if they're not quite as cheap as they were.


But just to point out, in twenty nineteen, so this is pretty covid. There were about three hundred thirteen companies that lost money. Twenty nineteen pre coving of those that now that had a market value, over a billion dollars at the end of twenty twenty, the average return for those three hundred thirteen money losing companies in twenty nineteen was over one hundred percent. The median return was seventy something percent. Those hundreds of companies are being priced as if they'll be the next Amazon, Google and Microsoft.


And I'm betting only a handful will be the great businesses and not all of them will deserve their lofty valuation. So I see some signs. It's nowhere near what I saw in the Internet bubble, but I do see some signs of froth, certainly on the small cap money losing businesses. Some of them are valuable, but it's traditionally been the world's worst investment strategy to buy. The companies trading at two, three hundred times are ones losing money. And so I'm expecting I would just say that might be a good time for the battery for.


Well, you touched on teaching, so I want to talk about your decision to become a professor at Columbia, teaching value investing to MBA students, what was appealing to you about becoming a professor? When I was pretty young and I guess I told you about my sort of epiphany I had by reading Ben Graham and then reading his books and then reading all the things that Buffett wrote subsequently as his best student, I always thought that if I were successful, I'd like to get back in some way.


And writing and teaching, I thought would be fun and sort of sharing what I know, the few one of the few little areas of the world that I know something about, could I share that with others? Because others had been kind enough to share with me. And I would say Columbia was a unique place. To be honest, I initially wanted to go back and teach at Wharton because that's where I went to school. They were still teaching efficient markets.


They didn't have much interest in a practitioner's view of how the world works. And Columbia was very centered that way. And maybe one of the only at that time only places, and maybe that one or two others. And it was the home of Ben Graham. I started out teaching security analysis, which was his course. So it an allure there. And their focus was that they valued what I had to bring to the table for MBAs. And I would say that was very, very rare back in ninety six that anyone would care to teach that way.


And they had a value investing place which was frowned upon pretty much everywhere else. And so it was exciting to be able to share what I knew I would say. I think I got pretty decent at teaching after three years or so. So once again, I apologize for my first three years of students, but I hopefully they they got something out of it as well just because I did try my best. But I would just say teaching. I have a lot of respect for the teaching profession and to do it well is very hard.


And what I would say is I think in those first at least 10 or 15 years, I learned more from teaching and trying to describe in very simple ways the thought process that I had. I think I learned more trying to be concise and trying to be clear and trying to be simple and simplify very important investment concepts. I think I learned more by doing that and clarified my own thoughts then whatever my students got, and I hope they got a lot, but I think I got more.


And so that was very it's a win win. I hope so. That was exciting. And I think it helped my writing. I think it helped me be more clear. I wrote, You can be a stock market genius before I started teaching and I thought I wrote it in a friendly way. But I realized after I started teaching MBAs that I really had written that at an MBA level. And part of the reason I wrote the little book that beats the market was to take it back a few notches.


And by then I had kids at five kids at that time. And so I kind of knew what a sixth grader would know. And I try to just keep my oldest guy, who I think was in sixth grade when I started writing the little book. And so instead of writing at an NBA level, I thought I was writing a sixth grade level when I wrote you could be a stock market genius, but I'd been in the business so long I didn't realize what I was assuming.


People knew so little became really a great chance to go back, say, if you're smart, sixth grader, how can I say this in a way that's simple enough and clear enough that you can start and as you know, starting early matters. So, Joel, if investing is like the game of Monopoly, it seems like the person acting as the bank is handing out more and more money to the players who are currently winning the game. I'm, of course, talking about the Fed's efforts with quantitative easing and this low interest rate environment we've been in.


Has your investing approach changed through this environment? Well, that's a great question and what I've written before, when rates are extraordinarily low, in other words, is the Fed manufacturing low rates to boost the economy? Are they mispricing money, which is important? And, you know, I would say, well, they can only control control the short end, but if they go out and buy long term bonds, they can also, at least artificially for time, keep long rates artificially low as well.


And how does that affect your investment alternatives, particularly the stock market? What kind of yield do you need from owning earnings? It be entitled to the earnings of a business relative, the price you pay? How does that compare to your other alternatives? Well, of course, that's going to make most stock investments of earning businesses more attractive on a relative basis. But of course, current rates aren't the important thing. The important thing are normalized rates if you're a long term holder of stocks and what are the normalized rates?


And the answer to that is I don't know. My guess is they're being kept artificially low. My guess is that inflation isn't really measured properly. If you include asset inflation, perhaps it's not including stocks and houses and a bunch of other things that might be inflated that aren't included. So that's actually been a pretty frequent topic of discussion for us, which is basically what is a proper discount rate in today's environment.


Not being so smart, you have to build in a large margin of safety, so to go back to first principles and what I wrote in 2005 in the book was that regardless of where rates are, I use six percent as my long term risk free rate. And if I'm going to buy an equity, I want it to be at six percent on a risk adjusted basis or I won't buy it. That doesn't mean I can't buy something for 30 times earnings or 30 times cash flow that let's call it after tax cash flow.


That's a three point three percent rate. If I think that's going to grow over time, I could beat the six percent flat risk free rate. And that's fine. There's nothing wrong with that. So say this, not like a hard and fast rule, though. I can't pay more than 16 times earnings or something. That's not what I mean. I mean, what are my normalized cash flows going to be over a period of time? What are the risks that I'm going to get those cash flows?


How does that compare to a six percent risk free rate that remains steady? If I can't beat that, I have no business investing in that business in my mind. And I still think that holds. I mean, if you're saying I'm building in too big a margin of safety, well, so be it. One of your alternatives. And Seth Klarman brought this up a lot. One of your alternatives for investing is not just what's in front of you today, but what you might have an opportunity to buy six months, 12 months or two years from now.


Your opportunity set is not just what's in front of you today and what can I compare? What can I buy now? The question is, if I keep my powder dry, what can I buy six months, 12 months, two years from now? And how does that compare to what I can buy today? And I think that's a very important concept that people missed, because you can at one percent interest rates decide that, hey, this thing's trading at one hundred times and it's growing a little.


So that's better than a one percent flat. And of course, I would say that's not building in the risks. I would say junk bonds that just went under yesterday, four percent for the first time on average, aren't really working in risk of default. Very much or bad things happen over the life of the bonds. And so my guess is that's not a great thing to be doing, even if it looks comparatively rich relative to the risk free, the short term risk free rate or even the 10 year rate or even the 30 year rate.


So I don't really have to know the answer to your question. I would just say I haven't changed my standards if I can be to six percent risk free rate when I'm thinking through and I have the security, if I think, number one, the earnings are going to grow. So that's a winning bet. And that I have pretty good vision. I feel secure in my knowledge. You know, my circle of competence says, hey, I think this is really going to happen and I feel pretty secure about that.


That's still my standard. And I'm not going to go buy anything that can't beat that. And I would argue that's a smart a smart way to be. And I wouldn't even tell you that the S&P, which is dominated by some of those big companies, even at a whatever it's at a three, a little over three percent yield free cash flow yield. We would have to discuss. You know, we have to see how it's a market cap weighted index.


The first five names are like thirty percent. What are those going to grow? Know you could you could make a case for some of those names yet. Is that even a smart discussion to have? Because the market is not a stock market, as the saying goes, it's a market of stocks. So I really tend to look at it that way. I look at individual stock in index investor may have a different answer, depends what index, depends where and everything else.


And they may have a challenge because if you don't know how to value a company, then you're kind of stuck doing indexes, which you could do tax efficiently, which has been a good deal last fifty years or 10 percent a year for the S&P. It's possible that continues. If not, it could still be pretty good. And so but if that's where your stock, then you could argue to keep some powder dry, maybe for a better buying opportunity for some of your investment.


People don't tend to be good at that either. So if you were my let's call you my sister, they were asking for advice. I still think that would be the best advice. Go by S&P ETF and with most of your money, if you want to play with a little bit. I wrote another book called The Big Secret, and I always say it's still a big secret because no one read it or bought it. But in that book I talked about picking an allocation to equities that you're comfortable with and whether it's 60 percent long, you know, because the market can fall 40 or 50 percent, you're going to get out of it.


You can't take more than twenty five percent loss. Maybe you're only better off being 60 or 70 percent long. But whatever that is, if you get really optimistic, maybe you can go up ten points to seven. If you're if you're your standard allocation of 60 percent. And if you get really pessimistic, you go down to fifty. I said you're going to be wrong, but at least you're limiting how much you're going to mess up by by limiting how much you go up and down.


And in fact, that's how major institutions and endowments in every run their portfolios, they have a weighting. They'll go up a little, they'll go down a little, but generally to have a weighting that's appropriate for the long term. So looking at your funds, they appear to be very highly focused on US stocks, so I'm curious if you ever invest outside of the US into other markets or even into other assets like gold or bonds, et cetera.


Once again, we go to circle of competence, so if you're talking about Australia, if you're talking about Canada, if you're talking about parts of Europe, I feel pretty comfortable investing for the most part in many of those businesses and those economies in those legal structures.


When you get outside of that area, it becomes a little bit different for me, not for others. I think there's huge opportunity. And if you want to study an area and you know the laws and you know how that works, I think no more power to you. I think looking more off the beaten path is always a great thing to do. I will say that the rule of law in the United States and some of these other much more established countries property rights, they're pretty secure.


If you said, what do you think of China, I would say I don't feel comfortable. It doesn't mean other people can't make money. It doesn't mean other people can't be comfortable investing their obviously economies growing there. But I have you know, it's I wouldn't call it a kleptocracy, but I would say that it's one man rule and anything can happen there. And I wouldn't feel having a big chunk of my portfolio might be a portion of my portfolio and more risky things.


There's nothing wrong with that. But that's not something that I would go seek out. And I think that the United States still out of the entire world, despite what maybe some questions getting a little worse in the last few years and even now and not knowing tax policy and a lot of other things, I still think is one of the greatest places in the world to invest in. As Buffett would say, if you have a basketball team and you're relying too much on Michael Jordan, is that a good thing or not?


Well, you have Michael Jordan. You might as well take advantage.


And I think the United States is one of those type of places that has to be a big chunk of your portfolio. I think it's one of the greatest places. Doesn't mean you can't do other things. And there are places off the beaten path where if you have an edge or knowledge. Sure. Go for it. But that's not where my expertise in. With everything that's happening around us, our little kiddos just can't go out and do the stuff that they used to do, so my wife and I opted to let them discover new worlds through great children's books.


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We'll take that analogy of having Michael Jordan on your team. I want to talk a little bit about position sizing, because I've heard you say that your largest positions aren't usually because you expect the most yield, but it's because you actually expect the least amount of risk. So maybe talk to us about that.


Most people say, oh, I took a 10 percent position, I took a 20 percent position, so I'd never take a 30 percent position. And I don't think that's the right analysis. If you're good at what you do and you have confidence in what you're investing in and realizing that maybe you'll be wrong. So you have to factor that in. So your level of certainty, what I'm I look down, not up when I invest. If I think I can make 10 times my money, that doesn't make it my favorite investment.


If I can invest a lot of money and I don't see how I'm going to lose anything or maybe lose one percent, but maybe I can make five or 10 percent, that might be a much better risk reward for me. And so typically, when I've done it correctly, my largest positions have been the ones where large positions on an eight a.m. basis, a percentage of assets under management business would be those. I don't think I can lose money and I don't mean losing money like a bad market stock market more.


It means that if you own a stock for ten dollars that has nine dollars in net cash and a good operating business that has a nice franchise doesn't mean that stock can't go down to six dollars. It just means the way I'm looking at risk is if I had my choice of when to sell this over the next few years, I don't think you're going to lose more than a dollar or two in that name, not where it could trade on any particular day.


But if I can patiently get out of that position sometime over the next couple of years, what's my realistic loss? That would be my risk in my mind. And if that risk were not large relative to my purchase price, then I could take a very large position that I've had positions, occasional, but positions that have equal 30 or 40 percent of assets for just that reason. Some of them, the bigger ones have been maybe 20 percent positions that grew as another way to to get those up there.


And so that can happen as well. So those are the two ways that I would have large positions. And so I don't really look at what percentage of the portfolio before I get to thirty or forty percent. I'm looking at how much I think I'm risking for that. I mean, one of our best investments ever that actually instigated the formation of the Value Investors Club, which I started with my partner John Petrie in nineteen ninety nine at the instigation was we had found an investment that was one of the best investments we had ever seen.


It was a small business that we could buy at half its cash value. It was a very complicated capital structure, so this wasn't very clear. But if you actually unwound it all, you were buying the business half its cash value, plus a very good business attached so that twenty four dollars in net cash and you can pay twelve. And it had good business attached in addition to the twenty four dollars in cash. So we backed up the truck and put 40 percent in.


And John Petrohue and my partner found on a Yahoo message board back in the late nineties someone who had had nailed it in exactly all its complicated glory, that position. And we thought we were the only guys on Wall Street to figure this out. And the light bulb went off in my head and I said, hey, there's intelligent life out there. Maybe we could find a lot of these people. And that was really part of the investigation for the Value Investors Club to sort of find people that are a little bit off the beaten path to share ideas with each other.


And that turned into the Value Investors Club. But it came from that idea where I was looking down saying I don't see how I'm losing money in this thing. I think it was found because it was a very complicated capital structure and people didn't realize it. And I didn't think we were taking very much risk. What it could be worth. Maybe it wasn't going to be worth 10x, but I thought it was going to be worth two or three easily.


And that was our largest acquisition, Foleo. So, Joel, what is the Value Investors Club and what has been the most rewarding experience for you from having started this?


Oh, there's been a lot of it's been very fascinating, I really recommend it to people as a learning exercise. You see how what the Value Investors Club for those who don't know is it's harder to get into than Harvard on a percentage basis. People put in their applications with an investment idea. And there's a group of us I'm not in that group anymore that's moved on. But John still is and goes through these applications to join the club. And if you have a really good idea, it started off like I was teaching at Columbia and there were maybe two or three kids who would have gotten a plus in my class every year.


And if you could write an investment pitch that would have gotten a plus in my class, then we would let you into this club. And your obligation would be to share your ideas at least twice a year with the other members of the club. And so you've got to give as good as you could take. It was meant really for amateurs. It turned into about half half professionals, half amateurs, but it was merit based. And so so the group of people writing on that site are very high end because it was very hard to get in.


And then you have a lot of smart people beating up on the other people who who put it right up. Then there's a question and answer portion that comes message board, where you go back and forth on that idea and you just see it develop. Like, what were you thinking here, what we're doing there, what this doesn't make sense because of this. And so I always recommend to Value Investors Club. We have a delayed portion of it.


So you can just look at many ideas over a period of decades of ideas on how great investors or many great investors think and how they evaluate an idea. And like I said, I have five kids in a number of them. I've used the Value Investors Club as a teaching. So the most rewarding thing is I've been able to teach my own kids with something that we created. And so that's been great. We also met it's sort of turned in originally to a little bit like American Idol for hedge fund managers if I'm dating myself.


But it was just new talent that you never would have guessed. I got to meet some really nice people at the beginning and we don't do this anymore. But I got to meet some of the investors and become good friends with a number of them. And just when you have a shared interest like this, that's pretty cool. So those are the two things I got to meet some great people I wouldn't have been able to meet. Also got to teach my my own kids using this tool, which I think is available to everybody.


And I'd say the number one way to learn. So at one point, you put some capital to Michael Buhriz Fund, I'm curious, did you find him through the Valley Investors Club? No, he had a his own website, though, he was writing up stock ideas, and I found it just because I'm a value investor and I think was called value investing something or other. And I read two of his ideas and I just said, this guy's brilliant.


So if you've read Joel Greenblat, especially the little book that beats the market, you might walk away thinking that Joel Greenblatt is this quant investor or this very systematic investor. And I do know that you focus a lot on the micro. So I'm really curious to know if the macro environment ever really weighs into your investment decisions.


So we spend our time ranking mostly in the US, although we do it internationally as well, ranking companies from one to, let's say, twenty five hundred based on their cheapness, their discount to our assessment of value. And of course most of the companies are affected the same or very similarly valuation wise for those low interest rates. And so it's a really of a ranking system. And if you're telling me, hey, find the best stocks you can find and your job is to find the cheapest stocks you can find in the US.


If that's my job, I'm not going up and down, up 60 percent long, 50 percent long of one hundred percent. I'm buying the cheapest things I can find at that time. And so across the twenty five hundred largest companies, those interest rates and those macro things are affecting most of them somewhat similarly. The other answer to question is I generally don't know. I have times where I'm more cautious that might go more to asset allocation than it would be to comparing one stock to the other in the cash flows that I'm expecting from that stock over time and my certainty of those.


So I don't bother too much with macro. I think Buffett answered this question many years ago, saying, you know, if you tell me what the Fed is going to do, I don't know if I change anything, I would know what to do. And, you know, it's a the markets and the economy are complex adaptive systems. And if you know one or two inputs, you can get yourself in real trouble because there's so many repercussions and so many moving pieces that to think, you know, something is kind of dangerous.


There's a saying the attributed to Mark Twain wasn't Mark Twain, but attributed to Mark Twain, which said it ain't what you don't know that hurt you. It's what you think. You know, I think that's what people when they do macro predictions, it's such a complex adaptive system. I mean, I would just even use last year if I told you as a pandemic and we're still not back to work. And I said, guess which way the market's going in.


Twenty, twenty. Most people, I'm guessing, would have gotten it wrong, and I'd say almost everyone. So that's a big thing to know.


I would say that's a big, big thing to know and everyone would have gotten it wrong. So just as a cautionary tale to being make your decisions based on macro, I find it very easy that if I find a business that's gushing cash, that I can beat my six percent risk free rate, that it's going to grow over time. That's got a good franchise and all those great things you look for in a business. I feel more comfortable doing that.


That's within my circle of competence and the macro environment over time is not going to affect that that much. And even if you want to talk about inflation, well, a business with pricing power usually is the best place to to shield your get self against inflation. So if that's one of your worries, I would say where would I hide from? An inflationary environment would be a business that has pricing power. So you've touched on the circle of competence idea a couple of times, but it sounds like from what I'm hearing, you're defining it a little bit differently than I'm familiar with.


So you're defining it almost like your overall strategy and your comfortability with this strategy that you've developed, whereas a lot of people might take circle of competence to mean more like a certain industry that you have to be an expert in, like I might be an expert in airlines. And so therefore I only invest in airlines. So maybe talk to us about how you define your circle of competence. I'm not smart enough on airlines, but some people are, and that would be a great strategy.


I mean, knowing an industry deep and well would be a big advantage. I think that's an excellent way to go about investing, although one of the analogies I gave in one of the books was sort of knowing a little area. Let's say you live in Cleveland, knowing the nicest house in Cleveland may not be so nice relative to Beverly Hills. And if you only know Cleveland, you may think you're getting a decent bargain. But relative to what's out there, maybe you're not seeing the whole picture.


So that would be a risk in only knowing one little industry. But there's a big advantage in having an edge. And so I'm for having an edge. And I think if I have an edge at all is not on the micro level. I'm not I know many better. I've met too many people who are better analysts, individual company analysts. I think I'm really looking for 40 thousand feet usually and taking a step back and contextualizing things and sticking to things I find simple.


And I'm trying to simplify things. And if I can't simplify things, I won't do it. It doesn't mean I'm so good at it means I know my circle of competence. Like if I can't understand that in a simple way and there's not nine million moving pieces, but it's super simple and I can understand it. I feel really good about that.


And so knowing where that is is my edge and being disciplined to bet to take my investments when I feel that I'm there. And of course, experience is helpful, having a lot of years of experience knowing, hey, this looks like that thing I saw 15 years ago and now I can contextualize it across all the other opportunities I've seen. How does this risk reward set up? What is my certainty level here relative to other things? I think that's where I'm good on.


A good portfolio manager looking out forty thousand feet, where should I size my positions? Right. You could do great. I think some of the best analysts I know size their positions wrong. If you're really great at something and you take a one percent position, you didn't you weren't right. You blew it. I mean, you should you should have a ten or twenty percent position if you really have high certainty and if you are right, but only took a one percent position and you should have taken a ten or 20, you didn't get it right.


You blew it. And so I think that's being able to size things. And and the other encouraging thing I tell my students is that and I laugh with my partner, Rob Goldstein all the time, is that if we worked for somebody else, we would have been fired many, many times. We made so many mistakes over the years and big mistakes. And so when I tell my students is you can still be successful over time making lots of mistakes and that should be encouraging to you because you will make mistakes.


You don't want to die from any of them. So portfolio size does matter. Knowing when to hit the gas pedal does matter and some luck does matter. There's no way getting around it. I mean, we asked Malcolm Gladwell, I got down to Wall Street in nineteen eighty one market hadn't gone up in thirteen years. That big bull market since pretty much eighty two. So that was pretty good timing. I'd have to sort of gotten out of the way at a really bad way not to have been successful during that time.


And so I don't want to be overstate the success I've had or some of my cohorts that we're lucky enough to be born in the right country, in the right ear and the right time and go to Wall Street the right time. I will say that market hadn't gone up in thirteen years and not many people I knew were going on Wall Street on the investment side. So I think that was lucky in the fact that I got smitten. And so once again, I have to thank Ben Graham for writing about it and just talking me while I was still in college.


So, Joel, you have an amazing new book out called Common Sense The Investors Guide to Equality, Opportunity and Growth. And I got to tell you, this is actually become now the most gifted book to my friends and family. And what's so fascinating about it is it's not really an investing book. It's more about tackling some of these major issues that are plaguing our country. I know. And probably others mainly around education and financial literacy, income inequality, et cetera.


To talk to us a little bit about what led you to write this book. Thanks for the question, I was really excited to write common sense, I knew it would be an investment bestseller, but it really is an investor's view of how we can solve some of our biggest problems. And, of course, you know, I think capitalism is the the best system there is. It really can bring prosperity, the most prosperity to the most people of it, of anything out there.


I shouldn't even have to say that I believe it should be settled at this point. But it isn't. And I think that's because a lot of things could be a lot better. So what I did is try to take my investment eye and look at some of our biggest problems and say, how would investor go about approaching these problems? How would you go about looking at them? And so there are a list of topics that I covered. And of course, as an investor, I've been very personally involved in education with the idea teach man to fish is the best way to help people, help them help themselves.


And of course, that is, I think, our biggest flaw in this country, that our education system is very unequal. Your sign to your school based on your neighborhood and if there's a bad school in your neighborhood and you have any resources at all, you just move to a school that has a to a neighborhood that has a better school, where you send your kids to private school and you have these options. The only people don't have an option are the people who don't have resources or the parents are struggling in some way.


If you're a savvy parent, even you can most schools have online. You can check out how good a school is. And you can if you have a savvy parent, if you're lucky enough to have a savvy parent who knows how the system works, they can move to a neighborhood that they can afford, even if it's a low income neighborhood with the best, best schools that they can afford. So that's there. But if you don't have that luck, if you don't have any money and you don't have your parents aren't savvy or they're immigrants or just for whatever reason, they don't have a good education because they got cheated by the current system, you end up in the worst schools with no choice.


So I got involved with the charter school movement. I was a co-founder of Success Academy that now is twenty thousand students. We have forty seven schools and those kids are vast majority, minority kids, a vast majority, low income. And those kids as a group, those twenty thousand kids outperformed. That would be the number one district in New York State beating the most the wealthiest districts. And the point there was not anything other than to show that it's not the kids fault, that with the right resources and the right background, right supports every kid, almost every kid can perform at high levels.


And the English language learners and the kids with disabilities outperform that success outperform the kids at the regular public schools, even in the wealthiest districts. So if you just look at the kids who are currently homeless, they outperform the wealthiest districts. So with the right supports, all the kids can do it. So it's a big failure of our system that we're not doing it. I think charters are under attack right now. I don't think they'll be able to expand as much as I think would be helpful.


But in the book I talk about and I won't bore you too much with it. But bottom line is, I talked about running around the system. How as an investor would you go about creating something that was more fair? I said that places like Microsoft, Google, Amazon, JPMorgan could actually help solve this problem. And all they would have to do is set standards. What tests, what courses, what certificates could you get in lieu of a college degree that we would accept for a high paying job and just tell nothing to do with schooling?


Just what what courses, tests or certificates could you go get? And we would put you in the running for a high paying job. And the reason for that is if you are poor or minority, one of our major cities, top 50 major cities, your chance of graduating college or one out of 11.


And we know college degrees. College graduates earn 70 percent more than high school graduates. High school graduates are 30 percent more than college dropouts. So one out of 11 are doing it now. So what do you do for the 10 out of 11 where the current system is failing them? If you're a poor minority and I'm saying if we run around the system, OK, and all we need is these companies to set standards, we don't need them to write tests.


We don't need to give tests or to make courses or anything like that. We just say, which of these things outside the current system could you pass work course certificates? Could you get courses that you could take? And then and I talk about how this works. And I talked a lot about play Kristiansen, how he set up, he says, how disruption happens. And so I talk about how this happens and all you need is a buyer.


Need a buyer, say I'll buy it if you pass this course or test. And then all of a supportive services for people to pass, these things will spring up as a result of having a buyer at the end. And I go through a lot of pages that I want to bore you with it. But it's incredible. And once, you know, the kids can do it with the right support, I think this works. And so I called it alternative certification.


And I hope you read common sense and and read about that particular part. I also talked about an earned income tax credit. I talked about skilled immigration. I talked about banking reform. I talked about retirement savings. So all those topics I tried to cover from the the viewpoint of an investor. And how would you look at that? How would you go about solving these problems for retirement savings? You're in the bottom nine out of 10 people in the bottom quintile don't have any Social Security.


If you make ten or twelve dollars an hour is nine thousand dollars a year. And if you have no savings, you're kind of screwed. There's easy ways I talk about what Australia does. I talk about how we can do some something that rhymes with that pretty quickly. And I talk about the benefits of compound interest that probably everyone listen to. Your program understands that the sooner you start, the better and we're not starting at all. And so it's very, very, very straightforward.


I think people will like that part.


Will that part in particular really stood out to me because you provide an amazing example of Australia in this superannuation that they're doing over there where they're essentially forcing people more or less to invest from their paychecks, but it's to their benefit. Right, well, what I would suggest besides doing on your own right now, I forgot what the cutoff is, but it's probably one hundred forty seven thousand dollars for one hundred forty three thousand dollars. I don't know for our stop paying Social Security taxes because you don't get any benefit from doing it.


They're supposed to what you put in is originally for Social Security was going to be related to what you get out. So if they taxed to be on that, it would get anything out of it. But I suggested one way to do this is to continue to tax people beyond this. But it would go into your own savings account.


But a portion of that, maybe 15 or 20 percent, would go to people who don't make that kind of money, go to people who are in their early twenties, who aren't making a lot of money because they're in their early 20s and they don't have high salaries and it's forced savings.


And once we just give it to them and that compounds at huge rates, if you start very early, low income, give them money to go into these accounts, they can supplement it. We can help them, supplemented in the way we already do with four one KS and IRAs and everything else. But here's money you get. It's done automatically similar to the way they do it in Australia, and that's a way that we can help everyone. And I don't think those people who either want to put more money into their four one K where you can do that, a part of that money has to go to help people who have less or we do it mandatory through Social Security, where you get to keep most of it.


So it's not really raising your taxes, but that tax benefit you're getting by investing in a tax tax benefit account, part of those savings will go back to those who need it even more. And so through both those methodologies, looking at the results that we've seen in Australia through superannuation, something called superannuation, it's a big, long, complicated name. But I explain in the book it's basically forced savings at an early age and everyone gets the benefit of compounding.


That's really what you're trying to do when there's no other answer. You need to start early. You need to get the benefit of compounding and everyone can do it. That's one of the things that everyone can do. It's a crazy, crazy thing. If you look at the compound interest tables and you don't understand them and this is an investing program. So some of your a lot of your listeners are aware of it. But I would still tell everyone, go take a look at a compound interest table.


It's crazy. One of the examples I give in the book is that if you started saving at age 19 and you put in a couple of thousand dollars every year from nineteen to twenty six for seven years and then never put in another nickel, and you invest your money at 10 percent or you start at age twenty six to 20 year for 40 years, the person who started age 19 and only put in seven payments and never put in another nickel ends up earning more money than the person who starts at age twenty six and puts in 40 payments.


That's how powerful compounding is and how powerful starting early is. And once people realise that, I hope they don't feel bad about spending money, but it's a good idea to save. And of course those when you're getting started, you don't have a lot of money, you don't have a lot of money to save. And so in the book, I talk about how we can do that for people. Now, have you seen any second or third order effects with the superannuation in Australia, is there rampant inflation or wage inflation just because they're offsetting for the net balance that they need to take home asset inflation or anything else?


Bottom line is they have like a cattrell there because obviously they didn't start superannuation to a little over into the 90s and so people who just started then really have been saving their whole lives and therefore don't have enough. So they have a supplemental program that makes up for that. So in my proposal, I said that if you didn't save enough here, I mean, we weren't going to give you less than Social Security, meaning this would be a supplement to Social Security.


So the worst you could do is your current benefits, Social Security. But if you saved anything, you'd be doing better than that. So Australia has a supplemental program that takes care of those problems because once again, it's even though they started twenty five years ago, that's still not a long time ago regardless. So they have a supplemental program and that's what we would have to do, have a supplemental program with this. Once you have a supplemental program, you can answer all the questions that arise as long as you know there's a minimum that you will be protected for.


There's another idea going around right now, I think it even has the name birth dividend, where people are advocating for more or less people to have money put into indexes when they're born so that the money can compound for them over time. What are your thoughts on this idea? I think that makes a lot of sense. I was trying to fund it. Obviously, there's a lot of good uses for money and at some point it gets ridiculous. But I do think if the government now that the government can borrow for free, if you can borrow one and a half percent for 30 years and they probably should issue 50 or 100 year bonds, the US government.


And if they if you could use that and use the government's borrowing power at very low rates to go, then invest at eight or 10 percent starting from birth, that could solve a lot of problems using the government's balance sheet. And so there's a lot of fancy tricks you could play there. But I tried to make a distinction in the book between government spending and government investing. There are certain things that have a clear payoff and there's certain things that are spending right now and there's a difference between the two.


And so it was an investing book. So there's some government investing in. One place of investing was education. One place of investing is earned income tax credit, where you take kids out of childhood poverty because that costs us a trillion dollars a year already. So if we can spend less than a trillion dollars and take everyone out of childhood poverty, we're making money. And that's the distinction I tried to make. And so I think a program like that where you give people retirement savings because they will have enough if you start them off early enough and use the power of compound interest and you have sixty five years or more to compound.


I love those kind of programs. I mean, they have to be done within reason, but I, I don't even think that. I just think as an investor you can buy one and a half percent and invest at higher. That makes sense. So, Joel, I have really enjoyed this discussion and I want to give you an opportunity to hand off to our audience where they can learn more about you, your funds, your books, your philanthropic endeavors.


Where can we follow along? Well, I can buy my books on Amazon, so good luck with that. I run a firm called Gotham Asset Management and otherwise I really wrote Common Sense, the latest book, really from the Heart, actually trying to come up with solutions that make sense.


I was hoping it would be more influential than your typical investment bestseller. And so if you do read it, have anyone that can be influential that you can get to read it out. Appreciate that help. So that's really where I go there. And of course, if you can support good education in whatever form is meaningful to you, I think that's the most leveraged way that if you're lucky enough in the investment world to have been successful to get back.


So anything you can find in that area I think would be very important contribution.


So, Joel, I want to thank you personally for coming on the show and also for writing these amazing books, especially your latest book, Common Sense. I find your approach to finding solutions over debating other topics very refreshing and really useful in today's environment. So thank you for that. I really enjoyed the discussion. I hope we can do it again soon.


Love to try. Pleasure to be here. All right, everybody, that's all we had for you this week, if you're loving the show, please go ahead and hit the subscribe button in your app so that you get these podcast episodes automatically every week, either the Wednesday Bitcoin show or the Sunday we study billionaire show. So with that, we'll see you again next week. Thank you for listening to Tippi, make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence to access our show notes, transcripts or courses, go to the investors podcast.


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