Market Wizard Joel Greenblatt

market wizards

market wizardsJack Schwager’s interview with Joel Greenblatt from Hedge Fund Market Wizards closed out the book on a very interesting note. I have consistently noted through many of these interviews how traders with very different approaches can still offer plenty of advice. The way Greenblatt kept quoting Warren Buffet throughout this interview was a perfect example of that.

Despite his focus on value investing, Greenblatt had some very interesting insight on topics like sticking with your approach, concentrated vs. diverse portfolios, having patience and managing your own account. I was also very interested in the systematic way that he conducts his research and applies his strategy.

Top Five Quotes from Market Wizard Joel Greenblatt

If that approach makes sense to you, then you will have the confidence to stick with the strategy over the long term, even when it’s not working. You will give it a chance to work. But the only way you will stick with something that is not working is by understanding what you are doing. – Joel Greenblatt

This addresses one of the topics that most traders initially avoid. No one wants to consider how they will handle the times when their strategy underperforms. Greenblatt makes a good point around this time in the interview that all good approaches will underperform at some point. We have to be prepared to handle that situation.

If I were starting out all over again, I would probably still do it the same way I originally did. But now that I am investing a larger sum of money, I prefer compounding at a good return without assuming the greater volatility that comes with high concentration, even if it means forgoing some extra return. – Joel Greenblatt

This idea is a revelation that came to me not long ago. The number of stocks or markets you trade is going to change based on the amount of capital at your disposal and the amount of experience you have.

For those of us just starting out in life, diversifying into a 100 stock portfolio will create a “death by 1000 cuts” scenario where the commissions can eat us alive. On the other hand, traders with a lifetime worth of savings will not want to expose themselves to the risk of a concentrated portfolio.

Stuff Happens. Don’t fall in love with any position. Always keep a large margin of safety, even if you’re playing with house money. – Joel Greenblatt

Avoiding falling in love with positions is pretty much common knowledge once you reach this point of the Market Wizards series. However, it is interesting to note how matter-of-factly Greenblatt explains the reason for this: “Stuff Happens.”

Most managers can’t wait for two years for an investment to work. They have to perform now. Their institutional and individual clients appear to demand it through their money flows. – Joel Greenblatt

Not the first time we’ve seen this idea either, but the psychology of mass markets is incredibly fascinating to me. The idea that most investors will lose money even when the managers they invest in make money over the long term is crazy.

We have to remember to always maintain a long-term perspective on our equity curve, even if we are trading a short-term strategy. It will also pay to remember that we need to be greedy when everyone else is fearful, and fearful when everyone else is greedy.

Manage your own account if you can. There is nothing like actually doing it and learning what it is like when you lose money and finding out what your emotions are when you are doing well and not doing well. – Joel Greenblatt

Managing your own account is probably the best way to truly understand what is happening with your equity at any given time. However, the emotions can be draining and the time required can consume you. The impact that markets can have on our emotions is very interesting, and you will learn quite a bit about yourself through trading.