In his latest interview on the Finance Simplified Podcast, Joel Greenblatt discusses how he simplifies his valuation process, despite all the verbiage around value investing. Here’s an excerpt from the interview:
The way I look at it is… a private equity investor. Private equity firms buy entire businesses. And that’s what stocks are, ownership shares of businesses. So when I value a business we’re really valuing it close to the way a private equity firm would. And a private equity firm’s not going to say, oh this company’s selling at a low price-to-book, or I can buy it at a low price-to-book, I’m going to go buy it. That’s not what they’re looking at.
In fact I know it’s not what they’re looking at. What they’re looking at is how much is this business going to earn over many years forward, and how good are the prospects, and how secure are those prospects. How am I going to value the value of that earnings streams today, and am I getting a good deal? That’s how a value investor should look at it.
A private equity firm will also say. Now that I’m going to have control can I improve on those earnings prospects. That’s not something you get to do as a public equity investor. But the rest of the analysis is the same. So that’s the way I look at it. The rest of the verbiage around value investing doesn’t make a lot of sense to me.
You can listen to the entire interview here:
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