During this fireside chat with The Hedge Fund Association, Joel Greenblatt explained how to find the best capital allocators. Here’s an excerpt from the chat:
Greenblatt: The best thing to do is look at what they’ve done, not what they’ve said. And so if management’s been a very good allocator of capital, meaning when they invest in the business, or they invest in other business, if they get good returns on that.
If their business is returning 30, 40, 50% returns on capital when they invest, the best assumption is to assume they’ll keep doing that.
And if they’ve invested and not gotten a good return, the best assumption is to assume they’re going to keep doing that.
And mathematically you can prove that’s kind of true. We do a lot more broad-based investing and more ‘quanty’ so you can actually look at those kind of statistics and see that on average that is true.
That management’s are good capital allocators continue to be good allocators, and no matter what the story is if they’ve been bad allocators in the past, good guess that they’ll continue to be bad allocators.
You can watch the entire discussion here:
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