Motley Fool Interviews Joel Greenblatt

Joel Greenblatt, managing partner of Gotham Capital, was interviewed by David Gardner. He had some good, simple advice: Buy good companies and buy them at cheap prices. Although this seems obvious, too many investors earn poor returns by buying the stocks of companies that happen to be doing well—which is precisely when they are most expensive.

Greenblatt discusses combining a business’s ranking in return on capital (a measure of “goodness”) with its ranking in earnings yield (inverse of P/E ratio, a measure of “cheapness”). Top ranked small-cap (under $1 billion in market capitalization) companies can deliver triple the market’s returns, he says, and top ranked large-cap companies can deliver double the market’s returns. Greenblatt has set up a web site, magicformulainvesting.com, that displays top-ranked companies at any time.

He describes Gotham Capital’s concentration in 5-8 stocks, which is the maximum number they can confidently predict earnings for. Greenblatt hints that “buying well” has done better for Gotham than “selling well,” but suggests holding stocks for about a year. By selling losers just before the year is up, and selling winners just after the year is up, an investor can take short-term losses and long-term gains, maximizing tax effectiveness.

He also recommends reading Benjamin Graham, David Dreman and anything by Warren Buffett. Greenblatt’s own books have gone on my reading list.

Tags: Business, Reading

Updated at: 8 December 2005 12:12 AM

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