Joel Greenblatt: When It Makes Sense To Bet 40% Of Your Portfolio On One Stock

Earlier this year on The Investor’s Podcast, Joel Greenblatt discusses when it makes sense to bet 40% of your portfolio on one stock. Here’s an excerpt from the interview:

Well, even in that one, I didn’t feel that I was being bold. I felt like I had an opportunity that doesn’t come along that often and I had to take advantage of it.

So in the Host Marriott situation, which was a spinoff from Marriott that split into two businesses. One was bad, which was called Host Marriot, which owned a lot of real estate and debt. But the capital structure was set up so that there was a piece of the business that wasn’t… the debt was owed by a subsidiary.

So the parent company, which was Host Marriott, didn’t really have effective debt on the company. They had assets that were assets specific, like a mortgage on a building or something, but they didn’t have debt for the overall company.

So actually, I paid $4 for what I thought was $6 worth of assets that were unencumbered by debt, plus there was a whole other business that was encumbered by debt, but it was in a subsidiary that could be worth a lot of money.

When I paid $4 for something that was debt free, a debt free $6, plus a lot of other stuff, I didn’t think I was taking a lot of risk. I thought that, “Wow, I just don’t think people see this, this is super complicated and I better take advantage.”

It’s kind of like finding one of the best things you’ve ever seen, but putting one or 2% of your portfolio into it. That’s not getting it right, that’s getting it wrong. That’s saying, “I don’t see this very often and now I didn’t really take advantage of it, so I made an extra half a percent,” or something like that.

You really have to take advantage of it and I don’t know that 40% was the right number. It’s true that I did that. I think I’m a little older, wiser and seen much worse, crazy things happen where I’ve actually made many mistakes.

I have a partner Rob Goldstein who joined me in 1989, and we’ve joked many times during our careers, that if we worked for someone else they would’ve fired us six times already. We make mistakes.

So 40%, maybe I popped a number someplace and maybe I got the analysis wrong, that’s true. But I did do that. You’re right. You called me on that. I’m not sure I would’ve done it that big, but still big.

You can listen to the entire discussion here: