Joel Greenblatt Joel Greenblatt:The Magic Investment Formula James Boric discusses Joel Greenblatt's investment formula. Using this “magic formula” over the last 17 years, you would always have made money. You would have beaten the market in every single three-year period since 1988, with below-average risk. And you would have turned $11,000 into over $1 million. Not since Ben Graham’s net liquidation formula has there been an investing strategy this profound -- this lucrative. And in today’s Sleuth, I’ll show you exactly what this formula is…how it works…and what stocks fit this formula to a tee. But before I introduce you to this revolutionary idea, let me give you a little Background on how I stumbled across it. Last week, my colleague Greg Grillot (founder of Whiskey & Gunpowder) and I boarded an Acela Amtrak train (more like an overcrowded missile with cheap beer)and landed in New York City two hours later. We were in the Big Apple to attend the very first Value Investing Congress -- a three-day event led by some of themost famous value investors in the world. The lineup of speakers included Seth Klarman of Baupost Group, Jim Chanos of Kynikos Associates, Bill Ackman of Pershing Square, David Einhorn of Greenlight Capital, Richard Pzena of Pzena Investment Management and my personal favorite -- Joel Greenblatt of the famed Gotham Capital. Greenblatt -- a Harvard Business School graduate -- founded Gotham Capital in 1985. He started with $7 million of outside capital -- mostly from junk bond king Michael Milken. Over the next decade, he earned 50% a year -- compounded. Even after paying back all of the original seed capital and factoring out expenses, Greenblatt grew his $7 million stake to over $350 million. Unbelievable! ********************** How to Make 50% a Year for the Next Decade -- Just Like Joel Greenblatt! If you follow my advice, you can make 50% a year on your investments every yearfor the next 10 years -- guaranteed. If I fall short even once over the next 10 years -- even if it's in the 10th year of your subscription -- simply let me know and I'll refund every penny you've paid in subscription fees. No questions asked. All the details you need are in this FREE report… http://www.agora-inc.com/reports/CPT/ECPTFB11 ********************** A mere $1,000 investment was worth $57,665 in 1995. A $10,000 investment was worth more than a half a million dollars. With returns like that you can see why I was so excited to listen to Greenblatt speak last week. The man is one of the best investors of all time. If there were a hall of fame for money managers, he would be in it -- right next to Graham, Buffett and Templeton. No questions asked. So when the famed Gotham-found manager said he had a simple two-part investment formula that could deliver far greater returns that the rest of the market -- I listened. And now, I’d like to share it with you. Joel Greenblatt: Solid Companies, Bargain Prices Greenblatt’s formula is predicated on the idea that you should only buy solid companies for bargain prices. Sounds easy, right? If it were, every one of us would be making as much money as Greenblatt. Unfortunately, it’s not that easy. Your average investor has no idea what it means to be a “good company.” He has no idea how to determine if a company is selling for a bargain price. In fact, he doesn’t even know where to look to find such companies. Well, if you are one of those “clueless” investors, fear no longer. Greenblatt’s formula can help. Here’s how it works… The first part of his formula insists that companies trade for a bargain price relative to earnings power (or yield). The idea is simple. If a company can’t earn more than 6% a year -- the amount you can get from a no-risk, 10-year government bond -- it isn’t a business you want to be in. Quite simply, it isn’t cheap relative to the risk you must take. To calculate a company’s earnings yield, you divide its annual earnings per share by its share price. For instance… If a company earns $1 per share for an entire year and its stock price is $10, its earnings yield is 10%. That’s higher than what you could get in a no-risk T-bill. So it may be a company worth looking into. But if you find a company in the same industry that earns $2 per share and trades for $10, that may be an even better investment opportunity. It has an earnings yield of 20%! Obviously, the higher the earnings yield, the better the bargain. Still, before you plop your money down into any company, you need to ask yourself a second question: Is the business a solid one? The last thing you want to do is to buy stock in a company that is cheap for a good reason -- because it stinks. Greenblatt determines whether a company is “good” or not by looking at its return on invested capital. In other words, is it investing its capital wisely -- adding to its earnings power? Or is it wasting its cash on frivolous investments that will create no (or even negative) value for shareholders moving forward? For instance... If a company spends $1 million in a new factory and it is able to crank out an additional $500,000 in profits the next year, the result is a 50% return on capital. That’s outstanding. It says management knows how to spend YOUR shareholder money to create added value. And over time, companies with high returns on capital will grow quicker than companies with low returns. Makes sense, right? Of course it does. So Greenblatt wondered how much money you would make if you invested ONLY in good companies (those with a high return in invested capital) that trade for a bargain price (companies with high earnings yields). ********************** This Will EXPIRE in 4 Days! The biggest commodities boom in the last 20 years is making Kevin Kerr’s readers an absolute fortune. This year alone, he has led folks to 76% gains on soybeans…88% on orange juice…154% on cotton…42% on cattle…another 89% on cotton…and 93% on gold. Now, for a very limited time only, you can start making these kinds of gains too. Kevin is accepting new members -- for a $100 discount, no less -- between now and midnight, Nov. 28. http://www.agora-inc.com/reports/RTA/ERTAFB52 ********************** Joel Greenblatt: Ranking the Companies from 1 to 3500 To answer that question, he went back and looked at the largest 3,500 companies (from your large behemoths like Microsoft on down to microcap companies with market caps of $50 million) from 1988-2004. He ranked each one in terms of earnings yield and return on capital -- from 1 to 3,500. The idea was to invest in the companies with the best combined score – those with the highest earnings yield AND the highest return on capital. So if a company ranked 100th in terms of earnings yield and 50th in terms of return on invested capital, it got a score of 150. And if another company ranked 6th in terms of earnings yield and 10th in terms of return on capital, it got a combined score of 16. After generating a score for each company, Greenblatt created a portfolio of the top 30 companies. Those were the 30 best bargains on the market at the moment. And anyone who invested in them would have made a fortune. From 1988-2004, if you would have bought the top 30 companies generated every year using Greenblatt’s formula, you would have averaged a 30.8% return for 17 years. During that same time frame, the market averaged a 12.3% return. So Greenblatt’s ideal portfolio (using his two-part formula) beat the market by almost three times over. And it gets even better… There was NEVER a three-year period between 1988 and 2004 where this portfolio of high-yielding, cheap stocks was not profitable. Over every three-year stretch, it outperformed the market 100% of the time. And every $11,000 invested in 1988 would have been worth over $1 million by 2004.
Folks, you can’t ask for much better results that those. So I wondered, what small-cap companies in today’s market meet Greenblatt’s stringent value criteria? I ran some numbers of my own, and came up with 10 companies that had at least a 25% return on capital and an earning yield north of 9% Check ’em out… America Service Group, Inc. (ASGRE:NASDAQ) I’ll be tracking these 10 companies in the following weeks and months to come. We’ll see if Greenblatt’s formula really does work in today’s live market setting. But my guess is that it will. In fact, I’m so sure I’ve decided to recommend several high-yielding, small-cap companies in the next issue of Penny Stock Fortunes. Don’t be surprised if they all outperform the market by three times over…or more. Until then, have a great Thanksgiving. I’ll catch up with you next week. Cheers, James Boric P.S. Joel Greenblatt is no doubt one of the finest investors of all time. But unless you are a money manager, run a hedge fund or follow the market every day, there’s a good chance you have never heard of him before today’s Sleuth essay. He isn’t as high profile as Peter Lynch. And he isn’t quoted like Buffett or Templeton. But he is every bit as successful. And his investment theories are priceless. You would do well to follow them. In fact, if you did, I can’t imagine you would ever lose money. Of course, the one problem most investors have is they simply don’t have the time to look for the handful of companies that fit Greenblatt’s investment strategy. It’s not like you can spend 10 hours a day running screens, looking at annual reports and listening to Webcasts of earnings announcements. So what can you do? The best thing I can recommend is to pay a small amount of money to have someone do that work for you. For instance… Chris Mayer runs the finest value-investing service I’ve ever seen -- Capital & Crisis. He bases his investment ideas off many of the same principles Greenblatt used to earn 50% a year for an entire decade. And for $59 a year, you can get all of Chris’s research and stock recommendations. I highly recommend you give his service a try. |
|
