Preston Pysh  3:42  

We’ve been anticipating your book since around Christmas. We’ve been really excited to get our hands on it. 

William, tell us a little bit about yourself and how you found yourself as a writer, really coming into this realm of investment? How did you get attracted to the writing of investors?

William Green  5:42  

It’s a slightly unlikely and unexpected story even for me because I grew up in England. I went to Oxford and I studied English literature at Oxford. I moved to New York when I was about 21. I thought that I would be a great novelist or storyteller and would write beautiful long pieces for The New Yorker.

I would get the business section of the Sunday New York Times. On Sunday, I literally would just toss it out. I would turn to the book review, which was really interesting to me. I regarded business and investing and money as kind of crass and vulgar. I thought these people who just devote their lives to making money are kind of superficial.

Then in my early 20s, I started to invest. I had sold a small apartment that my brother and I had owned in London. I had a little bit of money, not a huge amount, but I started to invest. I started to really study investing. I would read endlessly about mutual funds and the like. It reminded me of some sort of what had happened to me when I was a kid, when I was about 15 at boarding school.

I went to Eton, which is this sort of very posh, slightly oppressive English boarding school. I sort of secretly discovered horse racing and gambling on horses. I set up a betting account at a local turf accountant, as they’re called in England, in Windsor. I used to sort of sneak out when everyone else was rowing or playing cricket. I would go to this betting shop and I would bet on the horses. Initially, I made money and I thought, this is fantastic. I’m never going to have to work. 

Then I discovered that actually, I lost and I immediately stopped betting on horses, because I wasn’t interested in it for the thrill. I wanted to make money by playing this game. 

In a way, when I was in my early 20s, I discovered investing. It had the same kind of thrill and fascination to me. It was this game and you thought, “Well, if I can be smart, and use my brain in an intelligent and thoughtful way, I can actually make money without really doing that much hard work.”

Preston Pysh  7:53  

Well, it’s a function of probability. That’s what people don’t realize is, as you go to the track, it’s a probability game your odds of winning. When you invest in a company, some catastrophic event could happen tomorrow to that business, and it could go completely bankrupt. That’s a probability.

I think a lot of people need to respect the fact that there’s definitely an odds to it no matter how you shake it. I don’t care what anyone says. There’s definitely an odds.

William Green  8:39  

Yeah, it’s a game at some level. I think the best investors often are people who don’t have any emotion involved in the game. They truly see it as a game.

Then part of what happened to me was that I started to write about investors for various publications. For example, I profiled Bill Miller for Fortune. I went to the Palmer’s and interviewed Sir John Templeton for Money Magazine. I would write about Marty Whitman and his attempt to find a kind of apprentice who could match his greatness. I wrote that for Forbes.

I interviewed this series of incredible investors. I became kind of fascinated by this question of what made them special, what they had in common, why this tiny percentage of great investors was able to defy gravity if you like and beat the market. That became kind of this abiding intellectual passion of mine. 

Then I would say in the last few years, my interest in investing has kind of deepened as I’ve gotten older. I’m in my mid 40s now and you become maybe hopefully a little bit more soulful, as you reach middle age. I started to be interested in these guys not just as a way of thinking how do I get rich and be as lazy as possible. 

I start to think that these guys, Buffett, Munger or Pabrai, any of these great investors,  have repositories of tremendous practical wisdom. They figured out certain things about what works in life and what doesn’t work in life. They’re not flawless. There are plenty of them who’ve had terrible marriages and legal problems. Like all of us, they’re human, but I think they’ve figured out a great deal about how to live successful lives. 

I think part of what this book is about, is how do you get rich, how do you figure out ways to get rich, but part of it is much deeper than that. I come back again and again in the interviews to questions about things like that made you happiest? What’s giving you a sense of fulfillment? What disappoints you when you look back? What do you regret in the course of your life? Where do you get your strength in moments where you’re going through the wringer and life is not working out for you?

I look at investing in a slightly different way to most people. I’m fascinated in it as a financial game, but I’m also fascinated in it as a kind of microcosm that teaches you about how to live if you study and reverse engineer these very brilliant, very successful people’s lives.

Stig Brodersen  11:38  

Yeah, I am also fascinated, William, about how to make the returns yourself. Like a lot of people would look at someone like Warren Buffett and say, “I want to replicate what he’s doing.”

William Green  11:53  

It’s interesting, you immediately bring up Buffett, as we talk about the greatest investors. The thing that really struck me, surprisingly, was I had always thought Ben Graham was kind of the most important investing mind of the last century. 

Actually what you start to see is Buffett is kind of the most important investing mined but he has this extraordinary influence. Again, I would talk to these great investors and they were to talk about discovering Graham. They would talk about Buffett. It was kind of fascinating to me that actually, it may be that the greatest influence in the world of investing truly is Buffett at this point, but not Graham, who is his master.

Preston Pysh  12:44  

I had the same opinion. Whenever I started reading and studying Buffett, I immediately went to Graham because I knew that that was his source of or his foundation of investing. 

Then the thing that I really had an appreciation for Buffett was the fact that he took Graham’s, basically like cigar butt approach. But he really morphed it using Charlie Munger. I know a lot of people know this story, but his ability to basically take that and really kind of change it in a different direction where he was going after great business as opposed the ones that were kind of dying, I think was what really set him strategically apart from Graham and why so many people got such an attraction to Buffett.

He kind of took it from a dark, negative way of investing to this really bright and luminous way of investing that had a profound impact on society. I think that’s one of the reasons why so many people make that change and transition. Would you agree with that?

William Green  13:38  

It’s a very interesting point. I think you’re right, but I think it’s probably slightly unfair to Ben Graham. I think Graham came up with a couple of very, very profound insights, that that are still as, and that even is under playing it very significantly… These ideas, like the margin of safety that he came up with. It’s an incredibly profound concept. 

That applies, not just investing, but to everything in your life. This idea that the future is tremendously uncertain. And so, you need to build in some kind of margin of safety. 

I was telling someone recently that as I’ve been teaching my son to drive, if you can call me a teacher of driving, since I’m not great myself, I have a 17 year old son. I keep saying to him: remember Buffett. You need to check in your mirror. You need to look around. You can’t just change lanes. You’ve got to have this margin of safety. 

I’ve really internalized that idea from Graham so I think there are many very profound ideas from Graham. The idea that you don’t really want to be yanked around by the market, that the market serves you. It’s not your master, it’s your servant. 

Joel Greenblatt made a very similar point to me that you made about Buffett about how Buffett kind of added this one twist to Graham, which is that cheap companies are great. But if you can find cheap, good companies, that’s even better. 

Greenblatt said to me, “That one twist made Buffett the richest, or one of the richest men in the world.” 

When Joel went to Wharton, and he had these professors who kept saying to him, “The markets are efficient,” and just viscerally he didn’t believe it. Then he discovered Graham, like many of these investors in this book, it was almost a religious epiphany. He discovers Graham and it changes his mind about everything. He suddenly has this framework of what he described as a sort of very simple framework to see the world. 

Then he adds a few years later what Buffett taught him. He said, there’s two principles by marrying Graham and Buffett. That’s how he ended up making 50% a year returns in his first decade as a hedge fund manager. 

Stig Brodersen  16:05  

William, I’m actually curious about your own experience, because you said several times that a lot of the people who were really influenced by Warren Buffett, and it was almost like a religious experience. What is your own personal experience? 

William Green  16:38  

Buffett has always said, “Either you get it or you don’t. If you don’t get it, you’re kind of never going to get it.” For me, when I started to invest in my early 20s, I would read these things that would say, “You want to have half your money in growth funds and half in value funds.” For a couple of years, I kind of did that. In the end, I got to a point where I just had nothing that wasn’t valuable. 

For the last 20 years, I’ve only invested in value stuff. It just makes intuitive sense to me. I have not done any of the investing greatness of the people in this book, but like them, I’m naturally contrarian. I like to go against the crowd. I don’t necessarily think the herd has this tremendous wisdom. I understand that indexing is an incredibly powerful thing. It might even be that I’d be much smarter just by indexing. 

But intuitively, the idea of going against the crowd being contrary and buying stuff that’s cheap is very appealing to me. I think one of the things that’s interesting to me is that when you look at all the people in this book, and most of the great value investors, they’re iconoclasts. They are these mavericks and eccentrics who temperamentally go against the crowd. They question everything. They’re kind of deeper thinkers. 

I think by nature, I grew up as somebody who questioned everything. Even you know, if you think about the fact that as a 15 year old, I was sneaking out to gamble on the horses, rather than going to play cricket or rowing in England. I was trying to figure stuff out. It may have been kind of roguish, but it was me trying at a very early age to think so. 

So how do you beat the system, and by using your intelligence? When I look at someone like Joel Greenblatt, these are guys who are kind of masters of beating the system through using their intelligence. It may be that for almost all investors, it’s not a smart thing to do that you’re much better off indexing. However, I do think there’s this tiny group of investors who kind of show us the way and show that if you’re really smart and you get your emotions under control, you can win the game. 

That’s what fascinates me and maybe it’s kind of a mirage that I keep chasing after this. There’s a possibility that I’m going to be that tiny percentage that beats the market. But over the years I invested with Guy, obviously, who’s done very well, who’s beaten the market by hundreds of percentage points over the years. 

I invested with Marty Whitman. I have a separate account with Marty. I did it right after the tech bubble burst. Everyone was sort of miserable about stocks. I set up this account with Marty because he was a great bottom feeder. 

This is why I sort of still cling to this idea that even though there’s a hell of a lot of logic to investing in an index fund, actually, you get tremendous benefit by being a long term contrarian value investor, if you have the temperament for it.

Preston Pysh  20:38  

I think we’ve got to give respect to all these guys in your book and all these people that you’re talking about. These guys are very smart and have dedicated their life to understanding fundamental aspects like accounting. A lot of people don’t necessarily have that respect for the people they’re going against.

If you’re a person who’s trying to do it, like one day out of the week and you’re just really kind of not into it, I would argue you really do need to stick with an index. Would you agree with that?

William Green  21:17  

I think it’s a very important point. I think you’re absolutely right. Early in my career as a finance writer, I went to the Bahamas, as I was mentioning, to meet John Templeton. 

I was asking him for advice myself. He said to me, you know, you have no business buying individual stocks, unless you’re a professional, basically. He said, “It’s such hard work. You need to be tremendously diligent.”

 He said he didn’t buy individual stocks anymore. I guess he was in his 80s at that point. A lot of people who would disagree with this would say they do fantastically by doing individual stocks. 

[Templeton] doesn’t really manage his own portfolio anymore, because he doesn’t have a team of analysts who you can send out to do the research. He’s more a sort of Emeritus figure at  his fund business. 

I think there are certain advantages that an individual investor might have, because if you think about it, the pressure that these guys are under to perform every quarter is tremendous institutional pressure from their bosses.

If you’re an individual investor, and you have the right temperament, you do have an advantage in that you can stick with it, but you need an extraordinary temperament to do it.

Preston Pysh  23:39  

All these guys are handicapped by the short term interest of the people that are giving them money. You look at Guy and he’s got a community of people that trust him and are value investors and understand that it takes time and you might not have results right away. I think for a lot of these other hedge fund managers that especially the ones that you have in the the display in the book, these guys are totally handicapped by the people that are invested with them in their short term interests. 

William Green  24:07  

This is part of the genius of Buffett is that by having a corporation, the captive capital that you wouldn’t be subject to build panicking and bailing out.

Preston Pysh  24:21  

That’s my question. Why do you think more of these guys don’t adopt that model? I know Mohnish Pabrai is going to be doing that this year where he’s starting his own corporation, but why are these other guys not doing that? I don’t understand it.

William Green  24:33  

One of the things that’s fascinating about Mohnish is he says often in life, you have the best ideas are all out there and yet nobody does it. When he started off investing, he became obsessed with Buffett. Mohnish has this sort of obsessive brilliance to him where he just sort of started something and kind of takes it apart, dissects it, and understands it perfectly and then mimics it.

He said he looked around at the mutual fund world. It was just staggering that all of these guys could see how someone like Buffett had done extraordinarily well, not least by having a very focused portfolio, and they would own hundreds of stocks, and they would own hundreds of stocks that were overvalued. 

He said, “You looked at this, and you just knew that they were toast.”

And so I think it’s a really fascinating idea that the fundamental ideas about how to get rich and investing are not that elusive, I mean, we kind of understand that there are a lot of different ways to skin a cat. You can get rich in a lot of different ways, but their basic tenets of investing that we kind of know work. Yet people continue to panic and bail out at the worst time. Also, to buy high and sell low.  

I came to realize is that the challenges are as much temperamental as it is intellectual. This is one of the things that Bill Miller said to me is that in Europe during the financial crisis, he discovered that all of his analysts who claimed to be contrary and value investors were not value investors at all. They were value investors, so long as it worked.

In the moment, when it ceased to work, and really ceased to work when you were getting killed, they suddenly just didn’t have the temperament for it. I think it requires to do the right thing to apply investing principles, that the work not only requires a kind of intellectual understanding, but actually sort of wiring to be able to do it.

Preston Pysh  26:36  

I think the thing that Mohnish and Warren both share is the fact that they look at things through the lens of “I’m an investor, and I’m also a business owner,” and they have that business sense. When you mash those two together, you get such a better outcome. I think that’s one of the brilliance with Buffett and Mohnish. 

However, I want to explain something to the audience, just so that they understand it in case they didn’t understand what we were talking about there. So when we were saying that Warren Buffett, what he’s done is he’s basically flipped the hedge fund model on its head. So whenever a business becomes overvalued, in the hedge fund realm, that’s when everyone is giving you their money. 

That’s when you don’t want it because you can’t employ it properly. Then whenever the market crashes, everyone wants to take their money away from you. That’s whenever you need it, because you’re able to buy stocks at really cheap prices. So it’s very hard for a hedge fund manager to be successful because they’re getting the capital at the wrong times. 

What Buffett did is he flipped that model on its head. He incorporated a business which he bought Berkshire Hathaway, and that’s a whole other story. But under Berkshire Hathaway is where he’s making all his stock picks. 

Now if you have a person that wants to sell their stock in Berkshire Hathaway, guess who can buy it back at a cheaper price? Well, Buffett can. He can actually buy back the shares from the people that are selling it at the wrong time. Then if the market takes his company extremely high, he can actually sell more shares on the open market, raise some cash and keep it within his company. He’s basically taking that model and flipped it on its head. That’s why we were asking William why more people did not do that.

William Green  28:10  

It gets to a broader point which is something that Guy did discuss with me a tremendous amount when we were working on his book, “The Education of a Value Investor,” which is how your company and your investment firm is structured is actually tremendously important. 

People tend to focus on this issue of cheap stock and stuff like that. It doesn’t really matter if your shareholders are going to bail out at the worst possible moment. So you’re not going to have any cash to invest anyway. This is what’s happened with a series of the greatest value investors is that in these moments of crisis, their investors just panicked and ran. 

Bill Miller, who I’m a great admirer of, really is an astonishing mind. Bill Miller found that his assets went down 90%, from peak to trough. He initially was making $70 billion. He said to me that the 90% figure turns out to be quite a standard figure. 

Exactly the moment where there’s tremendous opportunity, your shareholders tend to bail out. This is a perennial problem. One of the things that Joel Greenblatt has done which is really fascinating because Greenblatt is a game player . He’s trying to figure out how to create a system where you’re not sabotaged by the foolishness of your investors. 

Originally, what he did was he set up a hedge fund that was very concentrated. He and his longtime investment partner did unbelievably well. After five years, they returned half of their shareholders’ money. After 10 years, they returned all of their shareholders’ money.

Suddenly, they didn’t have to worry at all about their shareholders panicking. That’s a very luxurious thing to be able to do. However, it was so that he didn’t have to deal with the emotions of the shareholders because running a concentrated portfolio, sometimes he would find that in a matter of weeks, he lost 30-40% of his money. He could deal with it, because he knew that the stocks were incredibly cheap, but his shareholders just couldn’t.

He’s done another thing more recently, which is a different way to solve the same problem. In 2012, he set up a series of mutual funds and hedge funds that own something like 300, very undervalued stocks. They have long positions in those stocks, and then they short 300 very overvalued stocks.

What he’s trying to do is, sort of remove a tremendous amount of volatility and emotion from the process by having a sort of systematic approach. He said to me, “The returns are not going to be as good as the returns of my concentrated hedge fund. But it doesn’t actually matter, because the shareholders are going to be able to stomach it more or more likely to be able to stomach it, because it won’t have that volatility.”

To be a really good investor, you really need to figure out this emotional, psychological side of investing. You should not just buy into this idea that value investing and being contrarian is really smart. You actually have to figure out how I am going to respond when my portfolio is down 50%. That’s what these great investors have is not just the intellectual understanding of these concepts, but the kind of visceral psychological strength to be smart and opportunistic at those moments of crisis. 

Stig Brodersen  32:16  

I can’t help asking, is that also how you evaluate who should manage money? Is that not by the owner looking at their track records in their philosophy, of course, but also how they managed through the last crisis? 

William Green  32:29  

It’s a really interesting question, because how do you really assess this? Think about it, when someone goes through a divorce, for example, there have been these studies that showed that money managers’ returns really are affected by divorce. How do you know what your money manager is going to go through? It is not just a financial crisis that they’re going to be able to deal with but they might have a divorce. They might have a sick kid.  

I’ve had this debate for years, and it’s with a very close friend of mine, Jason Zweig, who’s a brilliant columnist at the Wall Street Journal, a personal finance columnist. Jason, who’s interviewed more great managers than anyone on earth, and is a brilliant mind in his own right, indexes his own money. 

I’ve always said to him, “You’re just smart enough to come up with the wrong solution. You’re one of the few people who actually could beat the market and you end up indexing.”

He’s always said to me, “Maybe you can identify the guys who can beat the market, but then they’re under so much institutional pressure, so much pressure from their bosses. There are so many human things that can go wrong.” 

And so, I think it’s a perennially fascinating debate that even if you pick the right guy, will he continue to be the right guy? I haven’t truly resolved this and we can look back at someone like Buffett and say after all these years he was the right guy.

Preston Pysh  35:22  

Alright, so the question I got for you, I was immediately captivated by the first person that you mentioned in the book, Irving Kahn, and the picture in the book. I love that picture. Your photographer was amazing. He is a very talented individual. But the picture of Irving is sitting down. He’s very old. Unfortunately, Irving’s passed away since the interview.

William Green  35:47  

I think he was 108 when he was in the photo. IWe really haven’t focused sufficiently on my extraordinary partner, Michael Brown, who really is the reason why the book exists. He started five years ago taking these incredible photographs of these great investors. He started with Charlie Munger.

Since then, he’s photographed all these guys like Buffett, Bill Ackman, Irving Kahn and Joel Greenblatt. He’s just extraordinary. He has 

this kind of ability to get very close to these people and to get them to engage with the camera. One of the things that he does is he doesn’t talk during the photo shoots. He just sort of motions with his fingers to raise your chin up, or turn to the right. I think that this subject, whether it’s Buffett or Munger, they see his intense engagement and they’re very intense. So when you look at someone like Buffett in his photo, he’s looking directly at you and there’s a sort of a liveliness to him. 

I had a challenge when I was coming to interview Irving because Andrew Kahn, the grandson, just said to me he’s too sick and he can’t talk to me. I was sort of in despair because I didn’t want to do a potted thing where I went to the clips and read what everyone else had said. We ended up coming up with a solution which worked to a degree that I almost couldn’t have dreamed of, which is that I wrote out a series of questions, probably about six questions. They were sort of deep questions and questions I really cared about. 

Andrew took these questions to him and over several days, interviewed his grandfather on my behalf, wrote down the answers and sent them to me. There was something about it, I got that email and usually you’d be disappointed that you hadn’t interviewed the guy in person. I was tremendously moved by the email. 

One of the things that he said was the most tremendous investing advice ever. There was tremendous life advice as well. So I share both, if you don’t mind. 

The first thing I said to him, “What’s the single most important piece of financial advice you can share with our readers?” He said, “Safety. Considering the downside is the absolute most important thing you need to learn as an investor. You need to deal with this before you think about making profits. Everyone’s in such a hurry. They can make a horse gallop but can they see where they’re going? If you slow up and you don’t take crazy risks, and you don’t lose money, and you keep your eye on the downside, you’re going to do way better than your gambler friends in the long term.”

This to me was a very profound idea because that for one thing, I had made one income incredibly stupid investing mistake in the course of my investing career. I’m sure I made more. But this was a spectacularly stupid one, where I had invested in a private company that was run by a friend of mine that had incredible technology. 

Initially it shot up and I was thinking I was the smartest guy. I felt like I belonged to this six exclusive community of very, very smart people. Then it just kind of imploded. I sort of did a lot of soul searching about it afterwards.  

I realized the degree to which my ego was involved, and if I’d had my ego under control more and hadn’t cared more about impressing other people, I would have had a lot more money. 

The things that I’ve done really well over the years were the things where I just quietly invested with value guys and I stuck with it for many years. And so, listening to Irving Kahn was like one of those things where you hear something that you know already, but when you hear it from someone who’s 108, and who’s lived through World War Two, Vietnam, the Crash of 29, and you hear how he survived and prospered, you think, Man, I wish I’d been smart enough to learn that before. 

The other thing I would say, I was mentioning that he gave very important life advice. This is a recurring theme in the book. We’re trying not justi to tell people here’s how you invest. I want to learn from someone like Irving Kahn what gave you pleasure in your life? What gives you pride? What gives you satisfaction? 

He said his family is very important. Looking back, what really gave him pleasure was family and having healthy kids. I took that very much to heart. It’s very easy to get carried away and think that everything is about getting rich. 

Then you look at someone like Irving and he never was flashy. He never was buying fancy boats and big houses. His son Tommy would take him to a fancy French restaurant and his dad would just order a burger. The only thing he spent his money on really were books. 

When you look at someone like Irving, is he the greatest investor? Did he build a massive fortune? Did he average 40% a year? I don’t really think that’s the measure of his greatness. I think there’s a kind of life wisdom that you get from him that’s very, very important.

Preston Pysh  43:08  

Two things that I first want to talk about your idea that you were saying here about family, because I think everybody knows that deep inside with their own intuition. I’m just amazed at how often I ignore my own intuition. I think everybody else probably does it to where you know what the right answer is. 

William Green  43:48  

It’s a very profound idea. I started off as a sort of know-it-all, cerebral intellectual who felt like you can crack every knot with your brain and increasingly become more intuitive and perhaps less rational. I’d like to think you get wiser as you become more intuitive and less rational in a strange way. 

Guy Spier said to me a fascinating thing about Warren Buffett, at some point, he said that he’s pretty convinced that Warren actually makes all of his investments intuitively. Malcolm Gladwell talks about this, right? With thin slicing that you don’t really know what’s going into an intuitive decision. There is a tremendous amount of experience and judgment and rational activity going on.  

I went to Howard Marks who’s also really a genius. I said to him, “Do you think that’s true about Buffett that he makes his investment decisions intuitively?” Marks agreed. He said in his early days, he thought that everything was down to his intellect that was how he was doing anything. Increasingly, it’s intuitive. 

I think this is a very profound balance where you want to think as dispassionately and rationally as possible. You don’t want to ignore that message inside you. I once spent a lot of time interviewing Jeff Vinik after he managed the Magellan Fund.

Vinik said that when he had made an investment in a very cheap stock, and it made him physically nauseous to own it, he knew that it was a good investment.

Soros listened to the fact that he got tremendous back pain as the sort of signal that something was wrong with his portfolio. 

I think for all of us, you’re very wise to be connected to your sort of intuitive sense. Well, obviously not disabling rational analysis.You don’t want to be in the middle of a financial crisis and saying, “I just feel good about myself.”

You want to be brutally analytical at the same time. I always quote this thing to my kids. There is a wonderful line from EM Forster where he says, “Only connect the pros and the passion and both will be exalted.”

I think that idea of connecting the pros and the passion applies to everything, right? It’s the intellect and intuition. It’s everything really.

Preston Pysh  46:36  

Due to the length of this interview, we had cut it into two different episodes so make sure that you guys join us next week for the second part interview of William Green.

Stig Brodersen  47:17  

Now we have the part of time in the show where we answer a question from the audience. 

Sender  47:24  

Hi, Mohnish Pabrai, in his book, highly recommends “The Little Book That Beats the Market.” He believes if you use a magic formula as your sole strategy, you can get good returns. In fact, he uses a magic formula to find good companies. When you dig deeper, you find great people like Tobias Carlisle, who was on your show. He believes these strategies only work if you avoid judgment. 

Ignoring management and past performance is necessary here. I want to know if we can use these very simple strategies and simple ratios and numbers and get better returns and deal with experts who use judgment. Thank you so much.

Stig Brodersen  48:07  

I really think that this is an insightful question. I’m really digging into this form of investing right now, let’s just call this systemized investing. What you’re talking about is that you are following the same approach or the formula. That’s just how you invest. 

Now, let’s just stick with that for a moment because one of the key things about using this formula is that you need to keep calm and keep investing all the time. So even though you will see that the market is dropping, and you see that your portfolio, say dropping even more, you should still be invested. 

One thing I want to bring up is how would your portfolio do if you were following the magic formula, and Joe Greenblatt, he actually talks about that, because my perception was that these companies were more risky, because he was no smaller companies or looking company and the very, very cheap and they have very bad prospects. 

What actually it turns out to be is on an individual basis, yes, it seems like they’re more risky. There is a bigger chance of default. But if you look at it as a portfolio, they’re actually less risky than the market. They actually had fewer down years. 

Just to give you some stats on what Joel Greenblatt found was that when the market is going up, this is really where you will make your money. You will see that increase by 150%, compared to 100% of the market. Then if the market drops, it will only take 95% of that drop. 

Now one thing or one general criticism using this approach is of course that it’s back testing. So when we’re looking at all this and we’re saying yes, it worked in the past, do we know if it will work in the future? We don’t know. But again, I don’t think that that is especially valid when it comes to this form of investing because you could say the same thing withWarren Buffett, or you can say the same thing with George Soros. Will he still be beating the market? We don’t know the answer to that. 

However, I think there’s a lot of good arguments why this trend should really outperform the market in the future. The first thing I want to say is that to really find very cheap companies, basically, this approach is taking the best thing from value investing, which is finding very, very cheap companies. 

The other thing is that you don’t use your own judgment. Greenblatt actually did some analysis and that himself, and he figured out that even though people were getting the same list of companies that fall the criteria of the magic formula, if he will have the chance to look at it in itself, and then decide which companies they want to invest in, they actually underperformed the screen. 

That was most likely because they were taking away what appears to be the worst companies, but that was the companies that were making the best returns. 

Actually, Joel Greenblatt tried it himself. He also figured out that he couldn’t beat his own formula. So yes, I think there’s a lot of good things to say about it. But I also want to say that just to follow up on the Jack Schwager book we had last time. I think it’s very important if you use this strategy, that you are very consistent, and also that it suits you. I think it requires a certain quality for a person if you want to say, “Hey, I don’t analyze anything. I simply look at a formula.”

I think in times when things are bad, I think this is a really hard approach to stick to. I do want to say one thing, though. If you ever decide to start using this approach, I would be extremely interested in hearing how things go and what your experiences are. So if you ever decide to do that, please, please send me an email. 

Outro  54:24  

Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.