In this interview with Barry Ritholz: Joel Greenblatt highlights Warren Buffett’s analogy comparing investing in stocks to owning businesses. He explains that if someone sold a business, analyzed local businesses, and prudently invested in eight well-researched companies, it would be seen as sensible.
However, when the same logic is applied to stocks, people view it as risky due to daily price volatility and market perceptions.
Greenblatt emphasizes that concentrating investments in well-researched opportunities is rational, whether in stocks or businesses, challenging the stigma against focused stock investing.
Here’s an excerpt from the interview:
Greenblatt: Right, well, Warren Buffett has a good response to that as well. You know, he says:
“Listen, let’s say you sold out your business and you got $1 million. You are living in town, and you want to figure out something smart to do with it. So you analyze all the businesses in town.
Let’s say there are hundreds of businesses, and you stick to — if you find businesses where the management is really good, the prospects for the business are good, it’s run well, and they treat shareholders well — you divide your million dollars between eight businesses that you researched well in town.
No one would think that’s imprudent; they would actually think that was pretty prudent.”
But when you call them stocks and you get stock quotes daily on these pieces of paper that bounce around — people put numbers on it and volatility and all these other things, where really it’s not that meaningful — you know, from one sense, if you’re investing in businesses and you did a lot of research and invested in eight different businesses with the proceeds of your sale, people would think you’re a pretty prudent guy.
All of a sudden, if you invested in stocks and did the same type of work, people think you’re insane. It’s just an interesting analogy that I think of when people make fun of me for being so concentrated.
You can read a transcript of the entire interview here:
Joel Greenblatt Interview – Big Picture
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