A Survey of “Value Investors”
Part IV - Joel Greenblatt
Happy New Year!
Hope you all had a nice holiday break. Today, we wrap up our series in which we profile the famous “value investors.” In our first post, we talked about David Einhorn. Then, we profiled Seth Klarman and in our last post before the break, we did a piece on Howard Marks.
Our last profile is Joel Greenblatt. We talked about him briefly in our last post. Greenblatt is an American academic, hedge fund manager, investor and writer. Along with Robert Goldstein, he runs Gotham Funds; they are both Managing Principals & Co-Chief Investment Officers. He has achieved extraordinary returns, with an annualized rate of about 50% from 1985 to 1994, before closing the fund to outside investors.
Gotham’s tagline is “a fundamental disciplined approach to value investing.” Is Greenblatt another legendary investor who falls for the “value investing” fallacy? It’s a bit more complicated.
You will remember from this video that Greenblatt seems to have come closer to Buffett/Munger in the way he expressed skepticism on the concept of value investing. He said:
And you know, as Buffett has said, you know, growth and value are tied at the hip. I mean, part of what makes value is investing in a business that can grow over time. So they are not two different way they are classified by, let’s say, Morningstar or Russell, maybe there is much lower growth in value and much higher growth in growth, and they make it that way. But I’m looking for good businesses that are cheap.
Was this an admission that “value investing” is a myth? It certainly feels that way. What other positions has Greenblatt taken? Here is Part I of the Finance Simplified podcast where Greenblatt was the guest of the day:
HOST: I was wondering if you could talk us through a brief history of value investing for listeners who may not know the full story behind it or are just getting interested in the space.
GREENBLATT: I might not be the best one to talk about the history of value investing because you know, as Warren Buffett would say, all investing, if it is intelligent, should be value investing.
If his other statement from the Marks video was not an admission, this one certainly is. There is only a small leap from this statement to acknowledging what Buffett observed more than thirty years ago. If all investing is value investing, the word “value” is redundant. This is not just semantics, quite the contrary. This logical fallacy is the root source of many problems in finance today. This logical fallacy is what leads to the finance version of Parkinson’s Law: Investing expands to fill the space available for trading. Basically, every trade becomes an investment. Another consequence of this fallacy: Crypto achieves parity with stocks, and the public, in turn, gains access to 11 Bitcoin ETFs.
Greenblatt continues (Around the 7:58 mark):
The rest of the verbiage around value investing doesn’t make a lot of sense to me, that it’s defined the way Russell or Morningstar defines it. It really should just be defined as valuing things, being able to value something, and buying it at a reasonable price or discount price.
The host picks up on it and notices the whole value stock versus growth stock distinction rings hollow:
HOST: It just kind of seems a bit odd that you would categorize something as a value stock, describe this rotation and then when value stocks are bid up, you hear of this rotation into value, …, are they still value stocks anymore?
Spot on. How does it make sense to attach the label value stock to any stock when investment is all about finding bargains, which means it’s all about finding a stock where the price is sufficiently less than the value? The price, after all, changes every day. Can Amazon really be a “value stock” at $500? $1,000? $5,000? The point is not the specific number; maybe you do value it at $500 or $1,000, the point is that there is a price at which it exceeds value - it must be so - and the trade stops being an investment and becomes pure speculation. Consider this comparison: Your high school quarterback may have a lot of value for his team; he may be much better than the competition at that level, but his chances of playing in the NFL are next to nothing. Context matters.
In any event, Greenblatt, once again, makes it clear that the growth vs. value distinction is artificial, the same conclusion that Howard Marks came to:
I tried to ignore it. The stock market is … a market of stocks. We look at individual companies bottoms up. How they are categorized by other people shouldn’t really matter. So, I would suggest investors just ignore those categories.
I don’t worry about whether Amazon or Google is categorized as a value stock, as long as my valuation of those businesses tell me that the stock price is letting me own something that could be worth a lot more than what I’m paying. So that’s really what I’m looking at.
Are you convinced yet? If not, this one should tell you where Greenblatt is at. This is Part 2 of the Finance Simplified podcast:
There is no growth investing and value investing. There is investing. Ok? Growth and value are tied at the hip, meaning growth is how much a company is going to grow over time, its earnings and its cash flows go into valuing a business. And, you know, the distinction between growth and value investing doesn’t make a lot of sense. (emphasis added).
This is the most direct denunciation of “value investing” by Greenblatt that we are aware of. It also seems to be the most direct denunciation of “value investing” by anyone whose last name is not Buffett or Munger.
Here is a little secret. We initially intended to profile Greenblatt as the third post (for no particular reason), but moved him down to fourth (and last) in the series, because, based on public statements we could find, his views seem to be aligned with Buffett/Munger more than anyone else.
This begs the question: If Greenblatt is a true investor and sees right through the value investing myth, why has he been teaching a value investing class at Columbia (here is a syllabus from 2016)? Why is Gotham’s tagline “a fundamental disciplined approach to value investing?”
Also, how about this video, where he talks about how he defines “value investing”:
And, how about this one, where he flat out says (around the 1:37 mark): “Even Buffett says that most people should just index and I am a value investor.”
Finally, why would one form a club called Value Investors Club if one doesn’t believe in value investing? Please start at 21:15 of the Greenblatt/Marks video to hear how the idea came about.
So, how are we supposed to reconcile all that? If there is no value investing, he can’t be a value investor, can he? It’s hard for us to call the totality of Greenblatt’s statements intellectually honest.
Unfortunately, society these days tends to dismiss these types of inconsistencies. For us, these are very deep issues. Greenblatt’s statements are diametrically opposed to each other and, in our view, irreconcilable.
Imagine Greenblatt is pulled into a congressional hearing about investing one day. It could go like this (disclaimer: the following exchange is hypothetical):
CONGRESS REPRESENTATIVE: Mr Greenblatt, is it accurate that, for over two decades, you were a professor on the adjunct faculty of Columbia Business School teaching "Value and Special Situation Investing?”
GREENBLATT: Yes.
CONGRESS REPRESENTATIVE: CONGRESS REPRESENTATIVE: Did one of your syllabi say “[T]his course will provide practical experience in …. value investing”?
GREENBLATT: I can’t recall what it said specifically, but that sounds right.
CONGRESS REPRESENTATIVE: Mr. Greenblatt, you could have changed the title of the course or the syllabus if you wanted, correct?
GREENBLATT: Being the instructor, I suppose so.
CONGRESS REPRESENTATIVE: OK. Mr. Greenblatt, you are the co-founder of Gotham Capital, is that correct?
CONGRESS REPRESENTATIVE: I co-founded Gotham Capital, yes. It later became Gotham Asset Management.
CONGRESS REPRESENTATIVE: OK, thank you. And on your website, you also refer to the business as Gotham Funds, is that correct?
GREENBLATT: Yes.
CONGRESS REPRESENTATIVE: Is your company’s tagline “a fundamental disciplined approach to value investing?”
GREENBLATT: Yes.
CONGRESS REPRESENTATIVE: Mr. Greenblatt, did you ever describe yourself as a value investor in any public forum?
GREENBLATT: On at least one occasion, yes, I represented myself as such. I believe it was the CFA Society Chicago meeting.
CONGRESS REPRESENTATIVE: Mr. Greenblatt, are you a co-founder of the Value Investor Club?
GREENBLATT: Yes.
CONGRESS REPRESENTATIVE: And what was the purpose of the club?
GREENBLATT: It was intended to be a forum to exchange investment ideas.
CONGRESS REPRESENTATIVE: Investment ideas or value investment ideas? Your website makes reference to both.
GREENBLATT: Well, both.
CONGRESS REPRESENTATIVE: What’s the difference between an investment and value investment? Is the latter a strict subset of the former? Or are they the same thing?
GREENBLATT: All investing, if it is intelligent, should be value investing.
CONGRESS REPRESENTATIVE: Meaning what? They are the same thing?
GREENBLATT: If intelligent, yes.
CONGRESS REPRESENTATIVE: What is unintelligent investing?
GREENBLATT: Paying more for something than it is worth.
CONGRESS REPRESENTATIVE: OK, that would be unintelligent investing, but that would still be investing?
GREENBLATT: It would be unintelligent investing.
CONGRESS REPRESENTATIVE: But still investing? You realize that a red pen is still a pen, right?
GREENBLATT: I suppose.
CONGRESS REPRESENTATIVE: OK, how do you define speculation then?
GREENBLATT: You could call unintelligent investing speculation.
CONGRESS REPRESENTATIVE: Interesting. So there is intelligent investing which is paying less than something is worth, and then there is unintelligent investing, or speculation, which is paying more than something is worth.
GREENBLATT: You could categorize it like that, I suppose.
CONGRESS REPRESENTATIVE: OK, so every trade is investing in some form. It’s just that some of it is intelligent and some of it is unintelligent.
GREENBLATT: Well…
CONGRESS REPRESENTATIVE: And, in your view, speculation is a type of investment. It’s just an unintelligent one. Is that correct?
GREENBLATT: If you are speculating, you are not really investing.
CONGRESS REPRESENTATIVE: But Mr. Greenblatt, you just said, unintelligent investing is speculation. Which one is it?
GREENBLATT: People should always pay less than something is worth.
CONGRESS REPRESENTATIVE: Ok Mr. Greenblatt, I understand you are not ready to go where your arguments take you. Let me slightly switch gears here. Are you aware of Mr. Warren Buffett saying that value and growth are joined at the hip?
GREENBLATT: Yes, I used it many times in my speeches.
CONGRESS REPRESENTATIVE: Where did that phrase come from?
GREENBLATT: I think it was one of his investor letters.
CONGRESS REPRESENTATIVE: Indeed, his 1992 investor letter. Do you agree with Mr. Buffett?
GREENBLATT: Agree with what exactly?
CONGRESS REPRESENTATIVE: Buffett observed, and I quote, “most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’ Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.” He then added, “We view that as fuzzy thinking,” before stating “In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.”
Thanks for bearing with me, I know it’s a long passage. Do you agree with Mr. Buffett that value vs. growth is fuzzy thinking?
GREENBLATT: Yes.
CONGRESS REPRESENTATIVE: By extension, do you think the phrase value investing could be misleading? Do you think the phrase is redundant?
GREENBLATT: People define it differently. I don’t agree with how Russell and Morningstar define it.
CONGRESS REPRESENTATIVE: But you have your own definition?
GREENBLATT: We are different from the market.
CONGRESS REPRESENTATIVE: Mr. Greenblatt, just to be extra clear. You said on CNBC, and I quote: “Traditionally places like Russell and Morningstar will define value as low price/book and low price/sales. And that’s not how we define it. We define value investing differently. We try to value a business and try to buy it at a discount. That’s our definition of value…That’s our definition of value investing.”
GREENBLATT: Yes, that’s how we define it.
CONGRESS REPRESENTATIVE: Mr. Greenblatt, you’re clearly a smart man. You do realize that having a different definition for a phrase and thinking a phrase is redundant in the first place are two entirely different things, correct?
GREENBLATT: Yes, of course.
CONGRESS REPRESENTATIVE: So, which one is it, Mr. Greenblatt? Do you define value investing differently? Or do you think that the phrase value investing is redundant in the first place?
GREENBLATT: We define it differently.
CONGRESS REPRESENTATIVE: OK. Do you recall what else Mr. Buffett said about value investing in his 1992 letter?
GREENBLATT: Not off the top of my head.
CONGRESS REPRESENTATIVE: He said, and I quote, “In addition, we think the very term ‘value investing’ is redundant.” Do you agree with that statement?
GREENBLATT: I just define value investing differently.
CONGRESS REPRESENTATIVE: Different from Rusell and Morningstar, I get that. But you don’t think it is redundant? I guess if it were redundant, you wouldn’t attempt to define it.
GREENBLATT: It’s important for an investor to pay less than something than it is worth.
CONGRESS REPRESENTATIVE: You are not answering my question. Mr. Greenblatt, do you ever recall making this statement, and I quote: “There is no growth investing and value investing. There is investing. Ok?”
GREENBLATT: I may have said something like that on a podcast.
CONGRESS REPRESENTATIVE: This is exactly what you said, and yes, it was on a podcast called Finance Simplified. So you are of the view that there is no value investing?
GREENBLATT: Not the way it is typically defined.
CONGRESS REPRESENTATIVE: But there is value investing? If there is, why would you say “There is no growth investing and value investing. There is investing. Ok”?
GREENBLATT: Well…
CONGRESS REPRESENTATIVE: Mr. Greenbatt, isn’t this statement you made on this Finance Simplified podcast effectively equivalent to what Mr. Buffett said in his 1992 investor letter? I mean, what is the difference? You just admitted that there is no value investing, there is just investing. Which is, paying less than something is worth.
GREENBLATT: I suppose you could interpret it that way.
CONGRESS REPRESENTATIVE: Mr. Greenblatt, how can one reconcile the fact that you teach a class called value investing, that your company’s tagline makes reference to value investing, you characterize yourself as a value investor, you offered your definition of value investing on TV, you co-founded a club called Value Investor Club, and yet you, in no uncertain terms, also denounced value investing and said in what appears to be a come-to-Jesus moment, there is no value investing, there is investing.
GREENBLATT: Well…
CONGRESS REPRESENTATIVE: Mr. Greenblatt, were your average returns over 50% between 1985 and 1994?
GREENBLATT: Yes.
CONGRESS REPRESENTATIVE: Before you closed the fund to outside investors?
GREENBLATT: Correct.
CONGRESS REPRESENTATIVE: Mr. Greenblatt, you are clearly a very smart and successful investor. From what I can tell, you are one of the few people who actually realized that the concept of “value investing” is a misconception. Instead of disseminating that message to the general public, you, for the most part, actually promoted the concept in every way imaginable. Why did you do that?
GREENBLATT: There is no legal definition of investing, so people can define it as they see fit.
CONGRESS REPRESENTATIVE: Did it ever occur to you that your public statements could actually hurt the public? Did you ever think that the investing public, who may not have had the opportunity to develop the critical thinking skills that you clearly possess, may be misled by statements like these?
GREENBLATT: The investing public is free to make its own decisions.
CONGRESS REPRESENTATIVE: So, as one of the most successful and well-respected investors of our times, you don’t think you have any responsibility for being consistent and intellectually honest in your public statements? I have no further questions. Thank you.
If it seems like we are picking on Greenblatt, please understand that’s not the goal. We don’t know him, and he actually seems to be a likable guy. We even think of the act of investing more highly than he does. Between the 23-26 minute mark of Part II of Finance Simplified, Greenblatt seems to suggest that investing doesn’t rank too high on the totem pole of socially valuable things. We agree it’s not cancer research, but it could be the only thing that allows the cancer researchers to keep going and see their efforts through. Hard things are hard, and generally, they take a long time. If there are not enough investors that value businesses, which, by definition, force them to take the long-term view (you have to value cash flows in perpetuity), some very worthy businesses may never see the light of the day, or falter along the way. The efficient allocation of resources is not just a catchphrase you learn in Econ 101, it’s very real. The ability and willingness of an investor to step in may quite literally be the difference between life and death for somebody else down the road. So while investing may not be the most socially valuable act out there, it is yet another way, and sometimes the only way, to unlock socially valuable acts.
Going back to his public statements, though, we don’t find them acceptable. The “value investing” concept is not just a semantics issue; it has real implications for real people. We are also convinced that in large part, the misconception lives on because extremely smart and capable people, like Greenblatt, are not pounding the table as hard as they should.
Consider this: Picture a teenager out there who is trying to understand what investing truly means. There are likely millions of people who fit that profile. A resourceful teenager would, in all likelihood, come across most of these Greenblatt videos. As of this writing, the Greenblatt/Marks video has 131K views. The CNBC video where he talks about his definition of value investing has 51K views. Even this last one where Greenblatt characterized himself as a value investor has 17K views. Part 1 of the Finance Simplified podcast? 4.6K views. Part 2 which includes his most direct denunciation of value investing? 1.8K views. One doesn’t have to be a math genius or social media influencer to conclude that if Greenblatt’s true view is that value investing is a myth, which we are pretty sure it is, that opinion will likely NOT reach the public. Instead, our hypothetical teenager will be converted to the religion of value investing, further perpetuating the myth.
An economist would ask: To the extent there are investors out there who realize that the concept of “value investing” is a myth, why on Earth would they campaign hard against “value investing”? Isn’t it in their best interest to have the value investing myth continue? The longer that myth lives on, the more speculation there will be, and as a result, prices will be even more out of whack. Thus, at least in the domain of cash-flow-generating assets, there will be more opportunities for the true investor to exploit the price/value differential, if they have the patience and capital to withstand insanity.
Thus, one could hypothesize that value investors are not debunking the value investing myth (unless they are absolutely pressed on it) because they are not incentivized to do so. This leads to a legitimate question: Have the big investors actually fallen for the value investing fallacy? Or, do they realize that value investing is a myth, but they are incentivized to keep the myth going?
This is only a question that “value investors” can answer. At a minimum, that’s a dangerous game to play. Excessive speculation may widen the price/value gap, but it may also lengthen how fast the gap converges, if it ever does. Crazy driving behavior on the road is good for you if you are in the auto repair business, insulated from the dangers. It is not good for you if you are just another driver on the road. If you are a small “value investor,” you may be driven out of business before the market comes to its senses.
If, on the other hand, you are a big-shot investor, have a lot of patience and capital, and do not need to answer to outside investors, then, perhaps, the “value investing” myth is perfect for you to perpetuate.
We will finish with a final blurb from Greenblatt (13:05 of Finance Simplified podcast - Part 2):
If you are able to value an asset, it could be real estate, it could be bonds, it could be stocks, whatever it might be. If you are able to value an asset and buy it at a bargain price, relative to that value, that would be what I’d call value investing, or investing, however you want to call it.
Thank you Mr. Greenblatt for giving us this blurb which goes to the heart of the issue. The biggest challenge in front of broad prosperity and financial literacy is the realization that there is no real choice here. This is not a matter of agreeing to disagree. If one is able to value an asset and buy it at a bargain price, relative to that value, that is an investment, period. Calling that trade a value investment is akin to saying the Earth is flat. It’s a fallacy, a logical impossibility masquerading as an opinion.
Thus, we will call it investing. No meaningful progress in finance will be made until everybody else does, too.
