The Big Secret?

Sunday, April 24th, 2011

The Big Secret?

by Leo Kolivakis, Pension Pulse

Morgan Korn at Yahoo’s Breakout reports, Superstar Managers Don’t Mean Superstar Returns: Renowned Investor:

Renowned investor Joel Greenblatt can’t keep a secret.

The founder of Gotham Capital, the hedge fund he started in 1985 that produced 40 percent annualized returns under his 20-year tutelage, wants you to be rich. Very rich. And it doesn’t mean pouring your hard-earned money into five-star rated funds or hiring talking head money managers (they are plenty of them on cable business channels). In Mr. Greenblatt’s latest book, The Big Secret for the Small Investor, he decodes the secrets of Wall Street for the average investor and debunks the most common myths of investing.

What’s the biggest secret revealed? “Investing comes down to valuing something and paying a big discount to that value,” Greenblatt recently told Breakout. In his book, Greenblatt gives plenty of examples of how to determine a company’s valuation with simplified numbers and mathematical equations. He strips away the grandeur and lays bare the basics of investing. Greenblatt says investors should look for a basket of companies that appear undervalued, because winning big in the stock market means “figuring out what something is worth and paying a lot less.” Of course, determining a company’s value and future earnings can be very difficult, even for the most sophisticated and experienced money managers, Greenblatt admits.

Another secret Greenblatt divulges is that market-cap weighed indexes beat most active managers —- and all successful managers go through periods of underperformance. Therefore, investors should avoid chasing managers based on prior performance stats — as we know, past performance does not guarantee future success. Historically speaking, Greenblatt said 70 percent of active managers have underperformed the market over the past 10 years and “odds are investors are not going to find that superstar manager.” Believe it or not, retail investors and money managers really do compete on an equal playing field, he adds. The market is “very emotional,” and to separate the emotion from the reward, Greenblatt recommends buying ETFs —- specifically Value Index ETFs.

Follow Greenblatt’s advice and your portfolio could soon be well ahead of the markets and outperforming even the most eminent managers. Warren Buffett and Ben Graham made fortunes looking for value, and so can you.

You can watch the interview below. Let me comment on Mr. Greenblatt’s advice. Fist, I agree with him but with a qualifier (see below). The overwhelming majority of active managers underperform the market, especially after fees, so small investors are better off buying Value Index ETFs. In fact, some argue that large investors, like pension funds, are better off investing in a Fundamental Index instead of the traditional cap weighted index.

Tags: Breakout, Business Channels, Cable Business, Common Myths, Earnings, Grandeur, Hard Earned Money, Hedge Fund, Indexes, Joel Greenblatt, Korn, Market Cap, Mathematical Equations, Money Managers, Performance Stats, Small Investor, Stock Market, Successful Managers, Tutelage, Wall Street
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