In his latest interview with Ted Seides on the Capital Allocators Podcast, Joel Greenblatt relays a story about the only good market call he ever made in his career. Here’s an excerpt from the interview:
Q: Over that decade, did you have any positions that really went awry in terms of downside more than you expected?
Greenblatt: Yeah, well, there are a couple of times that things didn’t go well for us. When I got started, and this is ‘86. I started in ‘85. So this is towards the end of ‘86. There is a problem on Wall Street with Ivan Boskie and Mike Milkin. And Milken was financing a lot of the merger deals at the time.
And so I had in my portfolio five or six merger deals that were going on, whether I had a piece of a security or I had some iteration of it, and I thought that was diversity in my portfolio, but it turned out it was all the same bet, you know is the financing going to go through or is it not going to go through? And at that time, I literally had six deals. It wasn’t my whole portfolio, but I had six deals that broke at the same time, which I thought were independent best.
And so lost a lot of money. Luckily, I had been up that year. I think I was up 80%. I finished up 30. So I guess you could say I was playing with house money, but that’s a big drop and painful. And the great thing about that was that, remember, I said, get a little lucky. So I got a little lucky there in ‘87 before the crash. Things didn’t smell very well to me, and I liquidated a big chunk of my portfolio before.
That’s the only good market call I think I’ve ever had in my career, so I think you could be successful without knowing which way the market’s going. But in that particular case, I got kind of cold feet.
Now I think the lesson I learned from ‘86 when that happened was that there’s a lot of correlations that you don’t think are in your portfolio. So I was very careful to examine my risk and I think that really helped me and the same thing happened to me again where we were up about 80% and I think we finished up 30% for the year and I think that was a great performance given the stock market crash pretty precipitously and I think my experience from the previous year helped me.
I was more conservative than I would have been in that environment. I still ended up in a year where the market during a period really got questioned. A lot of people who are doing what I do gotten a lot of trouble and that was a great lesson to learn and I said, “You know what? In ‘88 I was super conservative. I think we were up 60 something percent that year.” If I were going crazy, I probably would’ve made 200% that year.
But my conclusion was if I could be super conservative, make 60 something percent, it’s crazy to do anything else. And so I always assumed what will happen to me if the world comes to an end while I own this portfolio? Am I still okay? That was just a great mantra to carry with me through that period of time.
You can listen to the entire interview here:
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