The investor library

Joel Greenblatt

1957- · Gotham Capital · He had a fifty-per-cent method, and then he published it.

Overview

Ran Gotham Capital from 1985 to 1994 at roughly 50% a year before fees, returned the outside money, and then spent the following decade giving the method away — first in a book about special situations, then in a two-factor formula simple enough to run on a spreadsheet and free enough that anyone could.

“Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match.”

Joel Greenblatt

Background

Wharton, undergraduate and MBA. He read an article about Benjamin Graham as a student and has described it as the moment the whole thing made sense.

He founded Gotham Capital in 1985 with about $7m, backed largely by the junk-bond financier Michael Milken. He returned all outside capital in 1994 and has run his own money and successive fund structures since, while teaching at Columbia Business School for over twenty-five years, co-founding the Value Investors Club, and chairing Success Academy, a large network of charter schools in New York.

Style, and how it evolved

Special situations, because the sellers are not choosing. Spin-offs, merger securities, rights offerings, recapitalisations, bankruptcy emergences. The unifying idea is structural forced selling: when an institution receives shares in a small spun-off subsidiary it did not choose, could not research and is often not permitted to hold, it sells regardless of value. The buyer on the other side is not competing with an opinion.

Small, ignored, and legally awkward. He deliberately hunted where size, mandate rules and index membership kept large capital out.

Then, the formula. Rank every company by earnings yield and by return on capital, add the two ranks, buy the top of the combined list, hold a year, repeat. Two variables — is it cheap, and is it good — and nothing else. He called it the magic formula, which he has admitted was a marketing decision he partly regrets.

The evolution is from an edge built on inaccessibility to one deliberately made accessible, and then to a long-short structure applied at scale. It is a career that moves steadily away from secrecy, which is the opposite direction from most of this library.

Performance

paid offa decisiona losswalked awaythe lifeshaded columns are the crashes — hover any mark

Gotham Capital, 1985-1994: about 50% a year before fees, over ten years. ✓ Published in his own book and widely cited since. He returned outside capital in 1994, having roughly multiplied it many times over.

The formula's live record after publication has been far less remarkable than its backtest, which he has been straightforward about.

✓ documented · ○ rests on secondary accounts rather than a filing

Case studies

Spin-offs, as a category. The clearest structural inefficiency he identified: a shareholder in a large company receives stock in a small subsidiary, has no research on it, often cannot hold it under mandate rules, and sells within weeks for reasons entirely unrelated to what it is worth. The mechanism: look for the places where selling is compelled rather than chosen. It is the most portable idea he produced and it does not require any forecast. ✓

Marriott, 1993. The company split into a business holding the profitable management contracts and one holding the property and nearly all the debt. The market treated the debt-laden half as damaged goods and sold it indiscriminately, which is exactly the condition he looked for. He wrote it up as the worked example of reading a spin-off's documents rather than its headlines. ✓

The self-managed accounts, and the best evidence he ever produced. He offered investors two ways to run the formula: fully systematic, or self-managed with the ability to opt out of individual names. Over the period he studied, the systematic accounts substantially outperformed the self-managed ones — the people who chose avoided the ugliest and best-performing names. The formula's edge turned out to be behavioural, and he had the data to prove it. ✓

The other side of the record

A record this good is where scepticism is most worth spending, so:

Ten years, small capital, and an empty field. Gotham's 50% was earned on a few tens of millions in a market where event-driven specialists were rare. That whole space is now crowded with dedicated funds, and spin-offs are analysed within hours of announcement.

The formula has not worked nearly as well live as in backtest. Its published results since 2005 have been unremarkable, and part of the original result may simply have been the value and quality factors in a period that rewarded them.

Publishing a method degrades it, which he acknowledges. Whatever the intent, the argument that the edge survives because people cannot stick to it is unfalsifiable — it explains good and bad results equally.

His later vehicles have been mixed. The long-short funds run at institutional scale have not reproduced anything like the Gotham record, which is itself evidence for the capacity argument.

And the book titles have aged badly. Stock Market Genius and magic formula were jokes that now read as exactly the register a serious method should avoid, and they attract precisely the audience least likely to follow it.

Key lessons

• Look where the selling is forced. Index deletions, spin-offs, mandate breaches, bankruptcy emergences — the seller who is not choosing is not setting a fair price.
• Cheap and good, in that order, is most of what a screen can do. Two variables took him a long way, and adding more mostly adds fragility.
• The edge is behavioural, and he measured it. The systematic accounts beat the chosen ones because the chosen ones skipped the uncomfortable names.
• A method you cannot stick with is not your method, regardless of its backtest.
• Teaching exposes the boundaries. Twenty-five years of having to justify it to students is a harder audit than any investment committee.

Reading and links

• You Can Be a Stock Market Genius — 1997. Badly titled and the substantial one: the special-situations playbook, with worked cases.
• The Little Book That Still Beats the Market — 2010. The formula, in about two hours of reading.
• The Big Secret for the Small Investor — 2011. The behavioural argument, which is the one he cares about most.
• The Value Investors Club — free to read, and an archive of the kind of write-up he wanted to encourage.

Marked ✓ where documented and ○ where it rests on secondary accounts rather than a filing. This is a profile of an investor, not a view on any security.

Primary sources

Go to the thing itself. These are the subject’s own publications or an institution’s own site. No bookseller links, and no referral arrangements — a reading list that earns per click is not a reading list.

• Value Investors ClubHe co-founded it; the write-up archive is free to read and is the kind of work he wanted to encourage.

Profiles of investors, not views on any security, and not personal advice. Figures are marked ✓ where they are documented and ○ where they rest on secondary or private accounts — investing biography is heavily mythologised and the well-known numbers drift with each retelling. Capital is at risk.

Corrections and right of reply. Where a criticism is made of a named person it is stated as a specific measure over a stated period, attributed to its source, and separated from opinion. Assessments are opinion, honestly held, on facts believed accurate at the date shown. If anyone profiled here — or anyone acting for them — believes a fact is wrong, it will be corrected promptly and visibly, and a reply will be published alongside it on request.

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