Joel Greenblatt is managing director and co-chief investment officer at Gotham Asset Management, having co-founded Gotham Capital in 1985. His written work includes the famous tome The Little Book That Beats the Market, published in 2005, which set out his ‘magic formula’ for private investors.
In this interview, he speaks to Dan Jones about the relative cheapness of certain US shares, why he is still a fan of big tech, the origins of the magic formula and its usefulness for investors, and the prospects for the UK equity market.
You typically look for investments that can beat the risk-free rate of 6 per cent. For the past decade you were probably told that was too conservative, but this year there’s been a lot of renewed talk about how investors should factor in higher interest rates. How do you consider the concept of the margin of safety, both conceptually and in the current environment in particular? DJ
If you’re going to buy a stock, the first hurdle you want to pass is: over time, are you going to beat the risk-free rate of 6 per cent? That’s obviously a lot higher than the risk-free rate’s been for a long time, and as you suggest that’s one way to put in a margin of safety. That doesn’t mean a company has to have a 6 per cent earnings yield right now. If you think it’s growing, a 6 per cent earnings yield would be really good, so that’s a little over 16 times earnings. But even something that’s earning 4 per cent – if you think earnings are going to double in the next couple of years, then you’ll be over that 6 per cent rate we’re looking at. So it’s a good way to look at the world of investing, how to compare apples and oranges: what do I pay, what’s my yield.