Warren Buffett disciple Joel Greenblatt averaged 50% annual returns over 10 years, and is still trouncing competitors. He offers a peek inside his legendary stock-picking strategy.

  • Legendary investor Joel Greenblatt perfected his craft by reading the classic writings of Warren Buffett and Ben Graham.
  • Greenblatt employs a value approach to investing and looks for stocks with attractive risk/reward profiles, are off the beaten path, and are easy to take advantage of.
  • From 1985 to 1994 — when Greenblatt’s firm was still open to outside capital — he averaged returns of 50% a year before fees. More recently, he’s beaten 94% of competitors on a trailing three-year basis.
  • In a recent appearance on the podcast “Value Investing with Legends,” Greenblatt explained how he was able to use Buffett and Graham’s sage advice as the foundation for his own market-dominating approach.
  • Click here for more BI Prime stories.

It’s no secret that Warren Buffett‘s musings on markets have captivated and inspired generations of investors. After all, his incredible returns, spotless reputation, and insightful quips make it easy for investors to idolize him.

The Oracle of Omaha has been canonized by many, but few of his disciples compare to Joel Greenblatt. The managing principal and co-chief investment officer at Gotham Funds attributes his success in investing to the timeless foundation that Buffett’s teachings instilled in him.

“Big picture, I learned investing from reading Ben Graham and reading Warren Buffett’s letters,” he said on Value Investing with Legends, an investing podcast. “And all these things were really formative for me.”

It’s safe to say that Greenblatt’s adherence to these core principles has led to great success. From 1985 to 1994 — when Greenblatt’s firm was still open to outside capital — he averaged returns of 50% a year before fees.

And he hasn’t slowed down much. More recently, his Gotham Index Plus Fund (GINDX) has outperformed 94% of competitors over the past three years.

He attributes this prolonged outperformance to how effectively he was able to take Buffett and Graham’s sage advice and mold his own investment philosophy.

“I would really go for a combination of where I’d make the most money, but also where the best risk/reward appeared to be at that time,” he said. “It was more like: ‘Well, I can buy a lot of this, not because I think I’m going to make 10x my money, but because in worst case I can lose a dollar or 2, and best case I can make five or 10.”

Greenblatt’s multi-step process

First and foremost, Greenblatt always wants to make sure that the deck is stacked in his favor. He wouldn’t place an outsize bet on a stock where he stands to lose a lot and make a little. Under this umbrella of thought, if an idea winds up not working out, he doesn’t stand to lose his shirt in the process. His downside is capped and his upside is essentially limitless.

“The next thing you can do is look in places where other people are not,” he said. “Anything changing, anything extraordinary, anything off the beaten path, anything small, everything obscure, anything complicated — you name it. That was really my hunting ground.”

Greenblatt tries to sniff out the stocks that no one else is paying attention to. You’re much less likely to come across a bargain if you’re looking in the same spots as everyone else. What’s more, he’s always on the lookout for “special situations,” including: merger arbitrage, recapitalizations, and spin-offs. He finds that these scenarios generally leave pockets of opportunity that are ripe for the picking.

Once he’s identified his risk profile and researched special situations or stocks off the beaten path, he then employs his next timeless piece of advice: look for the low-hanging fruit.

“Where I think I look at investing is looking for easy ones,” he said. “Buffett calls them ‘one-foot hurdles.'”

He continued: “Why look for ten-foot hurdles where I have to decide what’s going to happen in that industry five years from now?”

Greenblatt isn’t trying to reinvent the wheel when he’s stock picking. It’s hard enough as is. If he can’t figure it out, he moves on.

By employing this simple methodology and always focusing incessantly on value, he’s absolutely crushed markets. 

“I mean I was making over 100% a year on my portfolio,” he said. “Did that for three years before I got started.”

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