Joel Greenblatt: Today’s Opportunity Set Is Significant

Johnny HopkinsInvesting Strategy, Joel GreenblattLeave a Comment

We’ve just finished reading Joel Greenblatt’s Q318 market commentary in which he says:

  1. U.S. Equity Markets Remain Very Expensive (based on our 28 year valuation history)
  2. Valuations are high
  3. Markets are speculative
  4. The Large Disparity Between Growth & Value has continued
  5. Outperformance of growth and momentum driven indexes over value has continued through the year to date period (as of August 31st)
  6. Looking back historically, we are in an extraordinary period of significant divergence between growth and value
  7. There Has Been Outperformance by Money Losers

He also added that today’s opportunity set is significant saying:

Expensive valuation levels and the disparity between stock returns and fundamentals both point to very attractive expected spreads for us going forward.

  • Even though the market is expensive based on history, we do expect positive returns. Our long portfolios are much cheaper than the market, according to our research, and we therefore expect them to outperform meaningfully.
  • Our shorts are very expensive, according to our research, and can produce significant returns when markets revert to more normal levels.
  • Additionally, based on our research, predictive indicators of our strategy include:
    • Our spreads perform best following periods where markets are expensive.
    • Our spreads perform best following periods where the most expensive stocks beat the cheapest stocks (based on our metrics).

The valuation gap between value and growth has become very stretched. Although we can’t predict exactly when, we believe it will inevitably snap back in a big way. In the meantime, we stick to our systematic valuation process. In the periods following 1999 and 2007, valuations normalized leading to long periods of significant outperformance for our investment style. We believe our opportunity set is significant and our long/short returns over the next few years will rhyme quite well with similar periods in the past.

You can read the entire Q318 market commentary here – Gotham Funds Q318 Market Commentary.

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