Joel Greenblatt: Great Businesses Expand Their Margin Of Safety

During his recent interview with the Money Maze Podcast, Joel Greenblatt discussed his approach to investing, emphasizing the importance of recognizing the potential for businesses to grow beyond their initial appearances.

He uses Apple as an example, noting how its ecosystem added hidden value beyond hardware. Greenblatt contrasts short-term trades with holding great businesses for the long term, highlighting the concept of “margin of safety.”

He explains that paying more for quality can yield a greater margin of safety if the business grows over time. Ultimately, Greenblatt believes in investing in strong, well-managed businesses that compound value, as they naturally take care of themselves over time.

Here’s an excerpt from the interview:

Greenblatt: That was my skill set more than it was predicting, you know. But then again, Apple traded a number of years ago, and we had it in our portfolio at seven times earnings. And, you know, it wasn’t much different.

It’s just you tilted your head this way and said, you know what, maybe this isn’t quite only a hardware manufacturer, and maybe there is an ecosystem that’s worth something. And that was our analysis.

The real analysis was, boy, what a gateway to the internet, was really where the value, and this is going to be where most people come to the internet.

I didn’t quite get all of that likely Buffett did as to why they bought it, but I knew it was more than just a hardware company. And, you know, you were able to buy it, you know, well. So sometimes those worlds come together. It’s very rare, and we bought some really great businesses that were produced off the beaten path in some way.

And the idea is to hold those, and then the ones that you’re just buying cheap, you know, to trade, you know, what I said was, you trade those, and you hold, or, you know, for the long-term ones if you’re able to create a business at a good price and hold it because it’s a good business that will continue to grow.

It’s almost the analysis of margin of safety, right? You know, when Graham would find a cigar butt and, you know, pay $6 for something that was clearly worth 10, but it wasn’t this great business, so slowly, you know, maybe the 10 is only worth eight, your margin of safety would shrink.

Whereas, if you could pay $8 for something worth $10, but that $10 was growing at 12 or 14, your margin of safety is actually growing over time. So which one had the bigger margin of safety? It was most likely the one you paid more for, but the value was growing over time, and you felt good about it.

And so it’s sort of the way I look at things, you know, what am I buying? You know, I think you want to stick in general to good businesses that invest their money well. And, you know, more and more and more, I’ve gravitated towards that over the last 30, 40 years.

And, you know, if you want to go away with something, that’s what I’d go away with. Yes, you’d like to buy it well, but make sure you’re in a good business, and that takes care of itself over time.

You can listen to the entire interview here: