Joel Greenblatt: Redefining ‘Traditional’ Value Investing So That It Never Goes Out Of Favor

Here’s a great interview with Joel Greenblatt at Bloomberg in which he discusses the types of businesses he’s currently looking for and how he’s redefined the ‘traditional’ value investing strategy so that it never goes out of favor’

Here’s an excerpt from the interview:

We try to stick to companies gushing free cashflow. Huge returns on capital, meaning they deploy their capital well.

That avoids some of the value traps from ‘traditional’ value. I think that brings up the point – we don’t really think of value as low price-to-book, low price-to-sales investing. We’re actually valuing businesses based on cashflow, like a private equity investor would.

So if you’re trying to figure out what a company’s worth and buy it for less, at a bigger discount, that will never go out of favor even if value as defined by companies like Morningstar, which is low price-to-book or low price-to-sales investing. That may or may not stay in vogue. It may be out of favor sometimes, in favor, it may not even outperform the market going forward.

That doesn’t mean that much to me because those have been correlations that have worked with more than your fair share of companies that are out of favor. I imagine they’ll come back a some point. We’re actually valuing businesses based on cashflows. That’s what stocks are, ownership shares in businesses.

You can watch the entire interview here. (If the video doesn’t start you can watch it on YouTube here.)