RWH003: How To Win The Investing Game w/ Joel Greenblatt

Episode Summary

Executive Summary: Joel Greenblatt explains how his investing evolved from highly concentrated special-situation bets to a broader framework combining cheapness, business quality, and diversification. He emphasizes circle of competence, emotional resilience, and sizing positions appropriately, while highlighting parallels between investing, teaching, and building Success Academy. The conversation also reveals his humility, partnership with Rob Goldstein, and focus on games he can truly win.

Main Topics: Concentrated special-situation investing (Priority: 5/5): Greenblatt describes his early Gotham Capital style: finding obscure, misunderstood corporate events with large margins of safety and taking very large positions when the odds were highly favorable. Risk, emotion, and survival (Priority: 5/5): He discusses the psychological demands of investing, how losses feel worse when managing others’ money, and why staying alive to play another day matters more than short-term volatility. From cheap to cheap-and-good (Priority: 5/5): Greenblatt explains his evolution toward buying both inexpensive and high-quality businesses, influenced by Buffett and formalized through his research and the Magic Formula. Simplicity and the Magic Formula (Priority: 5/5): He argues that investing can be distilled into simple rules—cheap valuation plus strong returns on tangible capital—and that teaching and writing helped clarify those ideas. Cloning Buffett and role-model learning (Priority: 4/5): He credits reverse engineering Buffett’s Coca-Cola purchase and later meeting Buffett in person as pivotal in understanding great businesses and humility. Partnership and independent thinking (Priority: 4/5): Greenblatt highlights the value of Rob Goldstein as a blunt, independent, truth-seeking partner who reduces blind spots and emotional error. Education and social impact via Success Academy (Priority: 4/5): He frames Success Academy as a scaled, measurable, replicable model for improving outcomes for disadvantaged children, using business principles to solve an education problem.

Key Arguments: Large margins of safety justify aggressive position sizing; if something is clearly mispriced and hard for others to understand, it is rational to take a much bigger bet. Concentrated portfolios are not inherently reckless if the investor understands the businesses and thinks in business-owner terms rather than stock-price terms. Volatility is not the same as risk; the real risk is permanent capital loss or failure to survive periods of pain. Managing other people’s money adds a distinct emotional burden because their trust makes drawdowns harder to endure. Teaching and writing force clearer thinking and help strip investing down to its simplest workable principles. The Magic Formula works because it combines cheapness with quality, and both factors matter for long-term returns. Buffett’s example showed that buying great businesses at fair prices can be superior to only buying the cheapest stocks. Success Academy applies the same logic as investing: create a model that works, measure outputs, and scale a replicable system. Investors should stay inside their circle of competence and only speculate with money they can afford to lose. A good partnership requires independent verification, blunt disagreement, and mutual respect rather than deference.

Data Points: Annual return of Gotham Capital: 40% per year - William Green describes Greenblatt’s legendary long-run performance from the 1980s onward. Time horizon of early fund performance: 20 years - Introductory framing of Greenblatt’s record after founding his hedge fund at age 27. Portfolio concentration in early years: About 80% in 6 to 8 positions - Greenblatt discusses how concentrated his portfolio was in the early Gotham years. Host Marriott position size: Roughly 40% of assets - Example of a major special-situation bet Greenblatt used to illustrate high-conviction sizing. Cypress Gardens loss period: First month of going out on his own - He recounts an early investment in Florida Cypress Gardens that was hurt by an unexpected sinkhole. Initial Gotham 15-month return: Up 140% - Greenblatt notes the fund’s strong early performance after launching in 1985. Subsequent family-investor loss: Down 17% - He says family members who invested near a peak then suffered a 17% decline. Time managing outside capital before giving it back: 5 years to return half, 10 years to return all - He explains reducing pressure by ultimately managing only his own and close partners’ money. Success Academy scale: 47 schools and 23,000 kids - Greenblatt cites the charter network’s growth and reach. Smallest quote of his own investor club: 2 or 3 kids out of 40 - He describes how few Columbia students initially earned top marks and entry into the Value Investors Club. Current portfolio style: 60% to 100% net long in many portfolios - He explains his modern long/short and diversified approach. Return expectations for broad market/value portfolio: Mid-single-digit SP500 returns; 35%-40% value portfolio returns over next two years - Greenblatt gives his forward-looking valuation-based estimates. Two Bitcoins anecdote: Bought at $60 each - He mentions a partner who received Bitcoin early and retained one coin.

Pivotal Quotes: "I think you have to have a little bit of a screw loose to be able to take those risks." — Joel Greenblatt: On the emotional makeup required to be a successful investor with a concentrated portfolio. "Experience is what you got when you didn't get what you wanted." — Howard Marks (quoted by Joel Greenblatt): Greenblatt uses this line to frame a painful early mistake with Florida Cypress Gardens. "Understand what your circle of competence is. Doesn't mean you can't expand that circle of competence, but understand what it is and only play the game that you can play." — Joel Greenblatt: His closing advice on investing, learning, and choosing where to compete.

Implications: Listeners should focus on competence, sizing, and survivability rather than chasing every opportunity. The interview reinforces that durable success comes from simple rules, emotional discipline, and operating where you have an edge.