Joel Greenblatt, a seasoned expert in the world of bargain hunting, believes that value investing has been unfairly criticized. At 67, he heads Gotham Asset Management and challenges the conventional metrics such as price-to-book and price-to-sales ratios traditionally used to define “value.” According to him, these metrics don’t fully capture the heart of the philosophy. Speaking at the Value Invest conference in New York, Greenblatt emphasized the importance of a cash flow-centric approach, different from how entities like Morningstar or Russell categorize value. He likens his approach to that of private equity investors, valuing businesses as if buying them outright.
Over the past 20 years, value stocks have largely lagged behind their growth counterparts. The Russell 1000 Value Index, characterized by low price-to-book ratios and modest sales-per-share growth, has increased by 189%, while growth stocks have skyrocketed nearly 700%. Following the 2008 financial crisis, growth stocks surged ahead, maintaining dominance during the prolonged bull market that ensued. The burgeoning shift towards passive investing, primarily via index funds and ETFs, only accelerated the ascent of growth stocks. This left many traditional value investors in a challenging position, watching as undervalued stocks severely underperformed.
Nevertheless, Greenblatt, who has taught a value investing course at Columbia University for over two decades, contends that skilled investors with a knack for identifying underappreciated assets can still outperform the general market. He acknowledges the difficulty active managers face in beating the market but asserts that disciplined value investors who accurately assess a business’s worth and capitalize on occasional market mispricing can still succeed. Gotham Asset, which operates both hedge and long-only mutual funds, has achieved positive outcomes over the past three years.
Greenblatt, an MBA graduate from the Wharton School at the University of Pennsylvania, suggests that the extraordinary performance of large-cap stocks over the last decade or so might soon change course. “If you’re skilled at evaluating businesses and disciplined in portfolio management,” he said, “there’s still potential to deliver strong results. We believe we can contribute value.”
