In the 10.31.06 edition of Value Investor Insight, Joel Greenblatt discusses the importance of clarity and simplicity in great investment ideas. He suggests that if an investment idea is truly strong, you should be able to explain why it’s a great business, why it’s temporarily undervalued, and why it should be worth more in the future—all without extensive analysis.
If you find yourself overanalyzing or uncertain, the idea might not be as compelling as it should be. Greenblatt highlights that the most successful investments are often those that, after thorough research, seem obvious and straightforward.
Here’s an excerpt from the newsletter:
Greenblatt: There’s a clarity that comes with great ideas: You can explain why something’s a great business, how and why it’s cheap, why it’s cheap for temporary reasons and how, on a normal basis, it should be trading at a much higher level.
You’re never sitting there on the 40th page of your spreadsheet, as Warren Buffett would say, agonizing over whether you should buy or not. If you find yourself there, it’s either not yet clear enough in your head or it’s not as striking an idea as it should be.
I can describe why we own the stocks we do in a few sentences. The hard work, of course, comes in proving the assumptions that get you to that point.
But if you’ve done the work correctly, the actual idea ends up being very simple. The most money we’ve made has been on ideas that, once you looked at it the way we did, were pretty obvious.
You can find a copy of the newsletter here (paid subscription):
The Art of the Idea – Joel Greenblatt and John Petry, Gotham Capital
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