Joel Greenblatt on Relative Value Investing (Podcast)

Episode Summary

Executive Summary: Barry Ritholtz interviews Joel Greenblatt about his book Common Sense and his ideas for fixing inequality through education, alternative credentials, retirement reform, bank capital, and skilled immigration. Greenblatt argues many social problems can be improved with better incentives and market-like mechanisms, while reaffirming his stock-picking philosophy: focus on business quality, cash flows, and valuation rather than simplistic value-growth labels.

Main Topics: Education and charter schools (Priority: 5/5): Greenblatt explains why he co-founded Success Academy charter schools and argues that low-income students can achieve at high levels when given high expectations, strong supports, and better school choice. Alternative credentials for jobs (Priority: 5/5): He proposes allowing companies to publicly define tests, certificates, or courses that can substitute for a college degree, creating a lower-cost path to employment for disadvantaged workers. Bank capital and too-big-to-fail reform (Priority: 4/5): Greenblatt argues banks are structurally prone to trouble and proposes a new deductible, tax-free preferred equity instrument to raise capital buffers and align incentives without heavy regulation. Retirement savings and compounding (Priority: 4/5): He says the U.S. retirement system fails many low- and middle-income workers and suggests redirecting part of high earners’ payroll contributions into accounts for young and low-income workers. Skilled immigration as economic growth (Priority: 4/5): Greenblatt presents skilled immigration as a major net benefit, arguing it boosts jobs, startups, productivity, and tax revenue, and that the U.S. should create a simpler employer-driven system. Value investing, growth, and market froth (Priority: 5/5): He distinguishes traditional low-price-book 'value' from his own cash-flow-based approach, saying valuation still matters and that speculative, money-losing stocks are where froth exists. Teaching, mentorship, and long-term investing (Priority: 3/5): In the speed round, Greenblatt discusses compounding, early saving, mentors like his father, Ben Graham, and Warren Buffett, and the importance of passion over money in choosing asset management.

Key Arguments: Poor educational outcomes are not primarily a function of ability; with high expectations and the right supports, disadvantaged students can outperform wealthier peers. Charter schools work best when operators have freedom to hire, adapt quickly, and retain parents’ support, but successful district schools like PS 172 show the broader lesson can be translated. Companies should create alternative credential pathways themselves, because once employers define acceptable substitutes for a degree, an ecosystem of training and testing will emerge without heavy government involvement. Banks should hold far more effective capital, but incentives should be changed upfront rather than relying only on regulation; equity-like preferred shares could absorb losses and reduce bailout risk. The U.S. retirement system underfunds future retirees; compounding is powerful, so public policy should help younger and lower-income workers start saving earlier. Skilled immigration is economically valuable because immigrants and their children contribute more in taxes, create jobs, and launch a disproportionate share of major startups. Traditional value investing has struggled, but Greenblatt argues the real issue is definition; his framework remains centered on cheapness relative to cash flows, quality, and growth. Momentum, share buybacks, and other market factors are only useful when tied to causation and valuation; stock-specific analysis matters more than generic factor labels.

Data Points: College graduation odds for black/Hispanic/low-income students in major urban centers: 1 out of 11 - Greenblatt cites this to argue the current education system is failing disadvantaged students. Earnings premium for college graduates vs. high school graduates: 70% more - Used to show the economic stakes of educational access. Earnings premium for high school graduates vs. dropouts: 30% more - Supports the importance of educational attainment. Success Academy schools: 46 schools serving 20,000 kids - Greenblatt says the charter network he helped build has expanded significantly. Charter school performance vs. wealthy districts: Outperformed every wealthy district in New York State - He cites state test results in math and English. PS 172 math pass rate: 99% - Example of a high-performing district school led by Jack Spatola. PS 172 English pass rate: 94% - Used to illustrate unusually strong district school performance. PS 172 students with disabilities: 99% passing math and 94% passing English overall; English language learners: 90% passing English - Demonstrates that even subgroups can excel with strong leadership. General district school subgroup comparison: Students with disabilities and ELLs often far below 40% pass rates; ELL English pass rate in regular district schools cited at 9% - Illustrates the scale of disparity. Corporates/companies for alternative credentials: Google, Microsoft, Amazon, JPMorgan mentioned - Examples of firms that could define degree alternatives. Average bank equity cushion: 7% to 9% capital reserve - Greenblatt says current bank buffers are too thin. Suggested bank equity cushion: 20% to 30% - His proposed target for safer banks. Corporate bank loans under $1 million: Down 75% since 2008 - He links regulation to weaker small business lending. Minneapolis Fed bailout risk study: Two out of three chance of another bailout in the next century - Used to argue too-big-to-fail is not solved. Best-performing mutual fund example: Up 18% per year during 2000-2010 - Greenblatt cites this to show investor behavior can negate fund performance. Average investor in that fund: Lost 11% - Attributed to emotional buying and selling at the wrong times. Saving example starting age 19: $2,000/year for 7 years at 10% - Illustrates the power of early compounding. Saving example starting age 26: $2,000/year for 40 years at 10% - Contrasted with the age-19 example; the early starter ends up with more. Working-age families without retirement savings: Nearly half - Highlights the retirement crisis. Median retirement savings for ages 32-61: About $5,000 - Shows how low savings are for the typical family. Low-income black, Hispanic, or non-college graduates with no retirement savings: Average is zero - Used to emphasize disparity. Top income quintile with retirement savings: 9 in 10 families - Contrasted with the bottom quintile. Bottom income quintile with retirement savings: 1 in 10 families - Shows severe inequality in savings. Social Security annual benefit floor cited: About $9,000 per year - Used to show that Social Security alone is insufficient for low earners. Social Security taxable wage cap: $137,000 per year - Greenblatt uses this threshold in his retirement reform proposal. U.S. standing on skilled immigration: Second to last among developed countries - According to the Business Roundtable, only Japan is worse. Skilled immigrant fiscal contribution: $500,000 to $1,000,000 net benefit each in today’s dollars - Greenblatt estimates lifetime fiscal gains from skilled immigrants. Jobs created per skilled immigrant in the U.S.: Nearly 2 jobs - He says skilled immigrants generate employment for existing residents. Startups founded by immigrants: 51% of U.S. startups over $1 billion - Used to support the case for skilled immigration. Immigrants’ entrepreneurial rate: Twice as likely to start a business as natives - Part of his economic case for immigration. Fortune 500 companies founded by immigrants or their children: 216 - Supports the claim that immigrants are central to U.S. corporate dynamism. Microsoft H1B internal study: 4 additional jobs per immigrant - Greenblatt cites Microsoft as evidence that high-skill immigration multiplies jobs. H-1B cap exhaustion: Within about 5 days; demand about 3x cap - He says the current system is broken and too restrictive. Value vs. growth outperformance (5 years): Growth ahead by 11% per year - Greenblatt cites Russell/Morningstar-style definitions. Value vs. growth outperformance (3 years): Growth ahead by 17% per year - He uses this to show the magnitude of the recent trend. Value vs. growth outperformance (12 months): Growth ahead by about 43% - Shows extreme recent divergence. Money-losing companies with market cap over $1B bought in 2019: 261 companies - Used to illustrate market froth. Return of those money-losing companies in 2020 YTD: Up 65% - He suggests speculative excess is concentrated there. S&P 500 pre-tax cash flow yield: About 4% (slightly under 4%) - Greenblatt uses this as a benchmark for relative value.

Pivotal Quotes: "If you have high expectations, the kids can meet them. They just need the right supports." — Joel Greenblatt: On why charter schools and strong public schools can help disadvantaged students succeed. "Don't play him at golf, run around the current system, because it's just so unfair." — Joel Greenblatt: His metaphor for using alternative credentials and other market-based solutions instead of waiting for slow institutional reform. "We should be a brain magnet." — Joel Greenblatt: On the need for a more welcoming and economically rational skilled immigration system.

Implications: Listeners get a view of policy through an investor’s lens: incentives, not slogans, are the lever for change. Greenblatt’s ideas point toward school choice, employer-defined credentials, higher bank capital, better retirement access, and immigration reform, while his market commentary urges patience and stock-specific valuation discipline.