In this value investing masterclass, Joel Greenblatt discusses the two types of businesses investors should own. Here’s and excerpt from the masterclass:
Greenblatt: The two types of businesses we like to see… I mean there’s two ways to get a high return on tangible capital.
One is you don’t need a lot of capital, you’re asset light, so you don’t need a lot of working capital, you don’t need a lot of fixed assets which means you get to keep most of your earnings, which means you don’t have to borrow money because you don’t have to spend a lot of money.
So that’s a virtuous circle there, and the other type of businesses… companies that spend a lot of money and earn a lot of money on that spending.
You know Buffett had a great write-up on his railroad ownership where yeah it takes a lot of money but his cost of money is low.
He can reinvest at much higher rates of return and it’s very predictable and growing, so it’s a good business. So if you can deploy your capital well even better. Obviously Buffett would say growth and value are tied at the hip right, growth is a component of valuation and that’s the way we look at it.
You can watch the entire interview here:
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