We had the pleasure of interviewing famed investor Joel Greenblatt whose Little Book That Beats The Market popularized what is now often referred to as the “magic formula” approach to investing.
Greenblatt founded Gotham Capital in 1985 and has amassed one of the best long-term track records in the investment business. He is Managing Principal and Co-Chief Investment Officer of Gotham Asset Management, a professor on the adjunct faculty of Columbia Business School, the former chairman of a Fortune 500 company, and a member of the investment boards of the University of Pennsylvania and UJA. Along with Blake Darcy, Joel is a major force behind Formula Investing, an investment firm that seeks to make the “magic formula” approach more widely accessible to institutional and retail investors. He holds BS and MBA degrees from the Wharton School. Mr. Greenblatt is the author of You Can Be A Stock Market Genius (Simon & Schuster, 1997), The Little Book that Beats the Market (Wiley, 2005), The Little Book that Still Beats the Market (Wiley, 2010), and The Big Secret for the Small Investor (Random House, 2011).
MOI Global: Congratulations on the recent launch of the Formula Investing mutual funds and the publication of your third book, The Big Secret for the Small Investor. What is your vision for value-weighted indexing?
In our experience, eliminating the [“magic formula”] stocks you would obviously not want to own eliminates many big winners.
Joel Greenblatt: I think value-weighted indexing makes so much sense — that is, placing more weight in those stocks that appear to be at bargain prices, rather than larger market caps or other weighting measures. That logic will eventually take over and many of the large investment firms will design their own value-weighted indexes over time. I can’t imagine that this won’t be a very accepted way of creating indexes within a few years.
MOI: One of the reasons “magic formula” investing should continue to outperform is the fact that investors have a hard time sticking with the approach during long periods of underperformance. Have you considered value-weighted indexing in a closed-end vehicle to avoid capital flight at times of greatest investment opportunity?
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