Joel Greenblatt
medium confidence — compiled with source citation from the investment brain.
Joel Greenblatt
Joel Greenblatt
Joel Greenblatt is the founder of Gotham Capital and the author of The Little Book That Beats the Market, where he distilled his process into the "magic formula." His standing in this corpus rests on a single source — the audit notes of his Special Situation Investing class at Columbia Business School, kept by a student who sat in from 2002 through 2006. The notes are secondhand (dated Sept.–Oct. 2005), so his words are quoted as transcribed, and claims about his record are his own as reported to the class.
Greenblatt frames the whole course around one idea: prices move far more than the values they supposedly reflect, and that gap is the opportunity. On why prices swing so wildly he is deliberately agnostic: "It happens; it continues to happen; the opportunities are there. I don't know why it happens and I don't care—I just want to take advantage of prices away from value." His gum-store parable to his son is the course in miniature: "I sit around trying to figure out what businesses are worth, and then I try to pay a lot less for them." See intrinsic-value and margin-of-safety.
The two-variable screen
Greenblatt's "magic formula" ranks the universe on exactly two quantities, both computed on normalized, pre-tax earnings. First, what you pay: EBIT/EV, the pre-tax earnings yield. Second, what the business earns on its own capital: ROIC = EBIT/(net working capital + net fixed assets), deliberately excluding goodwill — "it states historical costs. It doesn't matter what I paid." His reported result: "Over the seventeen years, owning a portfolio of approximately 30 stocks" that had the best combination of a high return on capital and a high earnings yield could have returned 30.8 percent per year (the source md runs "capitaland" together — OCR artifact) over seventeen years. The formula works only if it doesn't work all the time — he reports it underperformed roughly one year in four — which is exactly the value-traps discipline of separating cheap-but-bad from cheap-and-good.
Special situations with a catalyst
The class is titled Special Situation Investing, and Greenblatt's stated preference is to buy with a catalyst so the market has a reason to correct the mispricing: "This is a special situations class so I would love to have a catalyst on everything I do." He holds that Mr. Market is inefficient in the short run but rational over two to three years: "If you do good valuation work and you are right, Mr. Market will pay you back." That is the special-situations and mr-market premise, and it is why the notes insist on concentration — Gotham ran 5–8 positions — rather than diversification, the opposite pole of concentrated-vs-diversified.
What the notes emphasize and omit
Greenblatt leans heavily on warren-buffett as a template: he tells the class he would have learned the treatment of goodwill and intangibles sooner "if I had read Buffett's letter in 1983." The notes also carry his conviction that the edge is context, not cleverness: he describes the difference between a 50–60% return on capital and a 15–20% one as "the big picture" that makes the money. There is no independent record here of Gotham's actual returns — the 40%-a-year, 20-year figure he cites to the class is unverified, so it is recorded as his claim at that date, not a corpus fact.
Sources
textbooks/markdown/value-investing-pdfs__Class_Notes_Joel_Greenblatt_1700147828.md