Mastering

Episode 3: Joel Greenblatt

 TABLE OF
CONTENTS

1
 3
MEET JOEL
13
MEET BENJAMIN GRAHAM
The man who launched Gotham Forefather of value investing,
Capital, concocted the magic formula, progenitor of Mr. Market
and stood up for the small investor

5 15
CASE STUDY:
HOW TO SPEAK INVESTOR THE DOT-COM BUBBLE
Put your mouth where your money is
Tuning out hype can be excruciating,
especially when it keeps getting louder

9
A BRIEF HISTORY OF 17
MODERN MARKETS ASSIGNMENT
A century of peaks and troughs,
CLOSING BELL QUIZ
plus a few instructor milestones
Find out how much of Joel’s
episode you’ve absorbed

11
CRACKING THE 18
MAGIC FORMULA JOEL’S READING LIST
Joel’s strategy is not magic; it’s
6 titles from the instructor’s shelves
grounded in three common-sense
principles of value investing

MasterClass is not a registered investment, legal, or tax adviser or a broker/dealer. Nothing contained in this class or
related materials is intended to be investment or financial advice. Please consult a financial professional before
making any investments. In addition, no instructors in this class have been paid to promote any securities or service in
this class, and nothing in this class is an offer or solicitation to buy or sell any securities.

2
3
JOEL
GREENBLATT
Founder and Co-Chief Investment Officer
of Gotham Asset Management

Joel’s father was a shoe manufacturer. This gave the younger Greenblatt an
early taste for business, which he went on to pursue at the Wharton School at
the University of Pennsylvania. There, he cowrote a paper that foreshadowed
the next 40 years of his career: “How the Small Investor Can Beat the Market.”
And beat it he did. In 1985 he launched Gotham Capital, a concentrated
hedge fund that rigorously implemented the principles of English American
investor Benjamin Graham, widely regarded as the forefather of value investing.
By looking for opportunities where other investors might not, Gotham Capital
enjoyed a net 34.4 percent annualized return between 1985 and 1994—which
trounced the S&P 500’s 12.4 percent over the same period. Gotham Capital
returned outside capital to investors in 1995.
In 2005, Joel published The Little Book That Beats the Market; it sold more than
300,000 copies. The Little Book That Still Beats the Market arrived in 2010. In
these books Joel describes a “magic formula” for investing. More on that later.

Education
The Wharton School at the University of Pennsylvania
Bachelor of Science and Master of Business Administration

Risk and Reward

In the early 1990s, the American multinational hotel chain Marriott split into two
entities: a real estate company and a management company. Most investors
favored the latter, as a subsidiary of the real estate business was saddled with debt.
But Joel dug deeper and saw two things: The person in charge of splitting up Mar-
riott had decided to run the real estate business (“I don’t think he’d do that unless
there was something really there,” Joel thought); and Joel could pay $4 per share
for the whole real estate company, estimating that it was worth $6 per share with
no debt—plus the debt-carrying subsidiary. He staked 40 percent of his portfolio
on the real estate business for $4 per share. In less than a year, the stock tripled.

Extracurriculars
At age 15, having decided to try his hand at betting on dog races, Joel found a dog
that offered a 99-to-1 payout. The dog’s prior race times were impressive, so Joel bet
big. When the race started, he realized his mistake: The dog wasn’t a long-distance
runner, and those prior times were for sprints. The moral? It takes solid knowledge
of the game to spot the difference between a sound investment and a dog.

In His Words
“Digging a hole is boring; digging for buried treasure is more fun.”

4
HOW TO SPEAK INVESTOR
Alpha believe in and hold it for years, spends is a cold, hard truth. So by
Generally refers to an asset or port- knowing there will be bumps along analyzing a company’s cash flow
folio’s return (profit) above and the way. American mega-investor over time, you can get a better sense
beyond what you’d get by investing Warren Buffett is known for his of its true value.
in the market. If Standard & Poor’s buy-and-hold method of investing.
500 index—a.k.a. the S&P 500— Commodities
provides an annual return of 10 Capital Raw materials such as corn, wheat,
percent and your portfolio hauls in A squishy word that can mean differ- and crude oil. Typically investors
15 percent, that 5 percent spread is ent things in different financial areas; use financial instruments like
your alpha. In the context of Ray’s in an investing context, capital refers “futures contracts” (the agreement
“holy grail” strategy (discussed to assets that can be deployed to get to buy an asset in the future at a set
further in Ray’s episode), alpha more assets, as opposed to cash for price) to gain exposure to a com-
refers to an individual stock, as day-to-day operations. Any shares modity without having to actually
opposed to an index. of stock you own are capital. If you store bushels of corn in their garage.
have a 401(k) plan, that’s capital. Commodities are an additional way
Bears and bulls Cash in a savings account you plan to diversify a portfolio.
A pair of investing archetypes to spend on stocks: capital. The cash
reflecting the health of and perspec- in your checking account that’s used Compound returns and interest
tives on markets. Bears think prices for rent and groceries: not capital. The happy state of earning interest
will go down; bulls think they’ll go income on existing interest income.
up. Likewise, a “bull market” is an Capital gains Let’s say your “rate of return” is 10
optimistic period of growth and a If you sold a share of stock for more percent, meaning that each year your
“bear market” is a glum period of than you paid for it, that’s a capital portfolio grows by 10 percent. (If you
falling prices. If the stock market gain. (Selling for less is a capital own a bond that pays you 10 percent
keeps running up? A bull run. loss.) If you’ve held the stock for a interest, it works the same way.) After
year or more, this is considered a one year, $100 becomes $110. And
Beta long-term capital gain and is taxed at after two years it becomes $121 ($100
A measure of price volatility. a special rate—0 percent, 15 percent, initial + $10 year one interest + $11
Specifically, it looks at how much or 20 percent, depending upon your year two interest), as you’re also
the price of a stock goes up or down income level, which for many inves- earning interest on the $10 gains
in relation to the market. If a stock tors is a lower rate than their normal from year one. At 40 years, that hum-
goes up 3 percent whenever the S&P tax bracket. This is one reason that ble $100 is worth $4,525.93. This is
500 goes up 1 percent, that has a wealthy individuals often pay a lower why many financial advisors stress
higher beta than a stock that goes up effective tax rate than you might the importance of saving for retire-
2 percent when the S&P goes up expect: Much of their income comes ment as early as possible.
1 percent. Back to Ray’s holy grail: from capital gains.
Here, beta refers to indexes such as Concentrated portfolio
the National Association of Securities Cash flow A portfolio whose assets reside
Dealers Automated Quotations All kinds of accounting trickery mostly or entirely in one industry or
(a.k.a. the Nasdaq) or the S&P 500. (such as the arcane minutiae of how niche. This can be riskier than a
assets are depreciated) can make the diversified portfolio (see: Diversifi-
Buy and hold reported “profits” of a company cation), as a single setback for the
An investing style with no particular open to interpretation and debate, industry—like a plunge in oil prices,
“sell date” in mind. The goal here is but at the end of the day, the actual if you’re invested in that industry—
to buy a strong stock or asset you cash that a company receives and will dent the entire bunch.

5
Day-trading This implies a discount rate of Exchange traded fund (ETF)
The act of buying and selling stocks roughly 10 percent—it translates These funds allow you to invest in
with the intention of holding them future value to present value. indexes such as the S&P 500 and the
for an extremely short duration, Nasdaq 100 Index; there are also
sometimes minutes or seconds. Also EBITA / Earnings ETFs for specific industries and
called “scalping.” An awkward acronym that stands for geographies. ETFs can be a way to
Earnings Before Interest, Taxes, and add diversification to your portfolio
Diversification Amortization, and a measure of a without having to buy dozens of
The concept of reducing risk by company’s profits. The idea is that the individual stocks.
investing in a wide range of assets. A “ITA” chunk of this term is less relevant
portfolio that has a mix of stocks, than the cash a company generates Fixed-income asset
bonds, and real estate would be more from its operation, so this is a way to Generally any kind of asset that
diversified than a portfolio with a filter out the accounting noise and pays you a predetermined amount
single stock or multiple stocks repre- focus on the essence of the business. of interest or dividend. A government
senting the same industry (see: Con- bond or corporate bond is a fixed-
centrated portfolio). Edge income asset.
An advantage that you have over
Dividends other market participants. If you Fundamental analysis
Cash payments that companies have a PhD in quantum physics and A way of analyzing stocks or other
make to the shareholders. Not all understand a company’s tech prod- assets by researching the “funda-
companies pay dividends: Larger ucts better than Wall Street, this mentals” of the company, such as its
and more established companies are could be your edge. products and profit margins. This is
more likely to do so; companies in distinct from technical analysis (see:
“growth mode” often do not. Efficient market hypothesis Technical analysis), which takes
Increases in a company’s dividend The idea that financial markets have into account only the chart patterns
payouts are often seen as a sign of already absorbed, or “priced in,” all of prices.
financial health. relevant trends and data. If you
suspect a company will have a ban- Hedging / Hedge fund
Discount rate ner year, the odds are that many oth- The practice of reducing risk by bal-
This term has two meanings. In the ers believe this, too, and the compa- ancing one asset class against another:
context of banking, it refers to the ny’s stock price already reflects your If you take a position in one asset
interest rate that the U.S. Federal optimism; therefore it is very difficult (such as buying a stock) that offsets
Reserve charges commercial banks to “beat the market,” as the market the risk of another asset (such as short
for short-term loans. So whenever knows what you know (and then selling a stock), then you have just
you see in the news that the Fed will some). Some value investors argue hedged (see: Short selling). The
“raise the rates” or “lower the rates” that this theory does not reflect real- term has broadened to include funds
(usually to combat inflation or stim- life market performance, which can that are actively managed by financial
ulate economic growth, respec- be influenced by irrational choices. experts and designed for wealthy
tively), that refers to the discount investors.
rate. But in the context of investing Equity
analysis, the discount rate refers to On a technical level, equity refers to Index fund
how much a future amount of money how much of a company’s assets A financial instrument that aims to
should be “discounted” to translate would be returned to shareholders in perfectly track the overall perfor-
it into today’s dollars. Imagine some- the event of liquidation. Conversa- mance of a market or industry. The
one saying they will give you $1,000 tionally, equity is often used as a most famous index fund is the S&P
today or $1,100 one year from now, shorthand for stocks. (As in, “my 500, a collection of 500 stocks
and you are fine with either option. portfolio is half bonds, half equity.”) representing the largest companies

6
in the United States. Buying shares value of your house rises to $360,000. Market capitalization
of an index fund like the S&P 500 This is a 20 percent increase on the (or market cap)
is generally considered to be less home, but a 100 percent increase of The value of a company as defined
risky than buying shares of just one your cash investment ($60,000)— by its worth on the open market. It’s
stock, as the risk is spread across and that’s the power of leverage. easy to calculate: Take the total
the entire market. Of course, if the home plunges in number of stock shares and multiply
value to $200,000 and you are it by the price of each share. So the
Initial public offering (IPO) forced to sell, you’d be on the dark market cap of a company with 10
The first appearance of a company’s side of leverage. million shares, each valued at $10, is
publicly traded shares on an $100 million.
exchange such as the New York Macro environment
Stock Exchange or the National The broader state of the economy Market correction
Association of Securities Dealers or an industry, as opposed to the If a market (such as the S&P 500)
Automated Quotations (a.k.a. the “micro environment” of a specific loses between 10 percent and
Nasdaq). entity. Rising inflation concerns the 20 percent of its value, it is said to
macro environment; a company be a “correction.” If the decline is
Intrinsic value struggling to ship orders does not. more than 20 percent, the ensuing
What an asset is actually worth, period is known as a bear market.
even if no one is willing to buy it. A Margin
speculative asset like Bitcoin might The profit margin, or gross margin, Net present value (NPV)
have no intrinsic value (outside of is a straightforward measure of A crucial concept in finance and
transactions, you can’t do much with how much money a company is investing, the NPV takes all the
it), but a snowmobile company has making after subtracting costs. expected cash flows in the future—
the intrinsic value of the snowmobiles This term can also refer to invest- both inflows and outflows—and
themselves, plus any future earnings ing “on margin,” meaning you then “discounts” them back to the
from renting them out. effectively borrow money to buy an present, using a discount rate. The
asset. This can both supersize upshot? The NPV reflects that $100
Investment thesis returns and add risk. today is worth more than $100
The underlying theory for why tomorrow, so it effectively “trans-
you want to invest in an asset. If Margin call lates” all future streams of income
you believe semiconductor compa- If you go on margin to increase (or costs) to their present-day value,
nies are a smart play because the your investment size, the brokerage which is useful for making invest-
growth of artificial intelligence will will generally require that you have ment decisions.
require the world to have more a certain amount of collateral in
computing horsepower, you have the account to back up the loan. If P/E ratio
an investment thesis. that balance dips too low, you The price (P) of a given company’s
might get a margin call from the stock divided by its earnings (E)
Leverage broker warning you to increase a.k.a. its profits. The P/E ratio is
A way of borrowing capital to invest your collateral—or your investment commonly used as a quick gauge of
more; you could amplify potential might be liquidated. how “expensive” a stock is.
returns—but also potential risk.
Think of a home loan: A house Margin of safety Retail investor
costs $300,000 and you pay $60,000 The concept of paying less than what Most likely: you. “Retail” refers
cash as a down payment, meaning a stock (or any asset) is truly worth, to nonprofessional individual
the bank loans you $240,000 for the giving you a buffer in case your cal- investors, as opposed to big firms
balance. Then the neighborhood culations are a bit off. Also the title of like hedge funds.
becomes more desirable and the Seth Klarman’s 1991 book.

7
Return smaller investors to purchase—such whether you should try and “time
A shorthand for profit, usually repre- as the U.S. multinational retail behe- it” perfectly so that you buy at a
sented as a percentage. If you invest moth Amazon reaching $2,785 per period of relatively low prices. This
$1,000 and the next year it’s worth share in June 2022—it often splits is tricky: Prices can look expensive,
$1,200, you just fetched a return of into smaller shares (20 to 1, in but then they might keep going up.
20 percent. Nicely done. Amazon’s case) to become more (If you thought that the S&P 500
affordable. Crucially, no value is looked too expensive in 2012, for
Secular gained or lost in a split to current example, and hoped to “time the
In this context, secular has nothing shareholders; think of it as cutting a market” to buy when prices dipped,
to do with religion; it refers to trends pizza into thinner slices, or someone you would have missed a decade-
that hold true for a long period of taking your $5 bill and giving you long bull run.) Hence the old saying:
time. The growth of e-commerce as five $1 bills in return. “Time in the market beats timing
a result of technological advances is the market.”
an example of a secular trend. Swing trading
Buying and selling stocks with the Valuation
Securities intention of holding them for a What a company or any asset is
A capacious term encompassing period of days or weeks or months; actually worth. There are many
virtually any financial instrument swing trading stands in contrast to ways to determine valuation (and
that can hold value. Stocks and day-trading and long-term “buy and this is often the subject of debate),
bonds are securities; cash deposits hold” investing. such as analyzing predicted cash
and most pension funds are not. flows, comparing the company or
Technical analysis asset to similar ones, or calculating
Short selling Analyzing an asset’s prices based the market value of the company’s
“Going short” means borrowing purely on its metrics (what it looks stock price.
shares or other assets from a broker- like on a chart) while ignoring its
age firm so that you can sell them at “fundamentals,” such as the stability Value investing
today’s price (say, $1), ideally buy of the underlying entity (see: Funda- A financial philosophy, conceived in
them back at a later date at a lower mental analysis). Some investors the early-20th century, by which
price (say, 50 cents), and net the dif- use technical analysis, some use fun- investors seek out companies whose
ference, less any brokerage fees. damental analysis, and some use a true value is potentially higher than
When you go short, you’re taking the combination of both. the value reflected in the price of
bet that the price of a stock will go their shares. Instructors Joel Green-
down versus up. Time value blatt and Seth Klarman are value
The overarching concept that money investors.
Small cap, mid cap, and large cap is more valuable today than in the
“Cap” as in market capitalization. future. Terms such as discount rate, Zero-sum game
Small-cap stocks have a market capi- net present value, and compound The theory that for every “winner”
talization between $250 million and interest are all in service of this larger in a financial transaction, there is a
$2 billion; mid cap between $2 billion theme—translating the future value “loser” on the other end, so ulti-
and $10 billion; large cap more than of assets into present-day estimates. mately the sum of total profits across
$10 billion. One way to diversify a (This term also refers to a component the entire game is zero. Hedge fund
portfolio is to have a mix of small-cap, of options trading.) legend (and MasterClass instructor)
mid-cap, and large-cap companies. Ray Dalio sees investment in individ-
Timing the market ual stocks as a zero-sum game—he
Stock split Let’s say you want to invest $1,000. also calls it a “talent war”—and
When the price of a stock gets so One of the oldest (and most index investing as an endeavor that
high that it becomes prohibitive for debated) questions in investing is can benefit everyone involved.

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 24,000

20,000
A MINI-HISTORY OF
Billions of Chained 2012 Dollars

16,000
MODERN
12,000 MARKETS
Explore a century of financial peaks
and troughs, plus a few career
milestones from the instructors
8,000

4,000

0
1929 1975
Year

1929: A stock market crash triggers method by which investors identify 1973: Due to a total oil embargo
the Great Depression, a decade-long undervalued entities through imposed on the U.S., the Netherlands,
economic rut that sees nearly one exhaustive research. and Denmark during the 1973 Arab–
in four Americans unemployed. Israeli War, both unemployment and
The era’s ravages would influence 1949: Australian American investor inflation skyrocket—a phenomenon
a century of economic policy, such Alfred Winslow Jones launches the dubbed “stagflation.”
as the Federal Reserve working to world’s first hedge fund, using a
raise or lower interest rates. range of investing strategies in order 1975: American upstart Ray Dalio
to “hedge” his bets. launches the hedge fund Bridgewater
1941: The U.S. enters World War II, Associates, where he creates
jump-starting the economy and 1965: American investor Warren market-beating portfolios using the
ending the Depression. Buffett, a student of Graham’s, takes power of diversification.
control of a struggling textile manu-
1949: The Intelligent Investor, a book facturer called Berkshire Hathaway. 1982: Seth Klarman, a New York City–
by English American economist and Under Buffett, it becomes one of the born investor in his mid-20s, joins a
investor Benjamin Graham, is pub- largest holding companies in the hedge fund called Baupost Group.
lished. It will come to be viewed as world. (In 2022 its estimated net
the bible of value investing—a worth was just shy of $1 trillion.) (Continued on the next page)

Graph represents real gross domestic product; source: U.S. Bureau of Economic Analysis
9
 24,000

20,000

Billions of Chained 2012 Dollars

16,000

12,000

8,000

4,000

0
1982 2022
Year

1985: Another American value 22 percent. (An index is a financial crisis could be on the horizon. Days
investor, Joel Greenblatt, launches a instrument that can be used to mea- later, Citigroup’s CEO resigns.
hedge fund called Gotham Capital, sure the overall performance of a
using a framework called “the magic market or industry.) 2008: U.S. investment bank Lehman
formula” (explored in his episode) to Brothers files for bankruptcy. This,
guide his investments. 2001: The dot-com bubble bursts. preceded by a housing bubble and a
Buoyed largely by the hype of new dearth of regulation, triggers the
1987: Around the world, markets internet companies, the tech-heavy Great Recession, which lasts some
crash in response to a tangle of new Nasdaq stock market index rose two years.
financial products, trade deficit pol- drastically from the mid-1990s to
icy changes, and market jitters. 2001—but this frothy market was 2022: In a historically lengthy bull run
October 19, which would come to be short-lived. (that is, a period of growth and gen-
known as Black Monday, sees the eral investor optimism), the S&P 500
Dow Jones Industrial Average—one 2007: American financial analyst posts a cumulative return of 800 per-
of three major stock market indexes, Meredith Whitney publishes a report cent since 2009. For some, this period
the others being Standard & Poor’s on the U.S. multinational bank Citi- becomes a cautionary tale about the
500, or the S&P 500, and the Nasdaq group and its precarious financial perils of keeping money in cash and
Composite index—drop more than health, warning that a larger financial missing out on historic run-ups.

10
 CRACKING THE
MAGIC FORMULA
Joel’s strategy is not magic; it’s grounded in three
common-sense principles of value investing

1. Buy cheap (undervalued) assets. 3. Buy assets that are cheap, good,
This simple concept leverages one of and diversified.
Benjamin Graham’s foundational Let’s say your list of cheap and good
principles: Use a “margin of safety” to companies is entirely from within the
buy assets for less than they are worth airline industry. If a macro-economic
on the market (more on page 13). curveball (like a global pandemic)
tanks air travel, your entire portfolio
2. Buy assets that are not just is at risk. So Joel added the criterion
cheap, but good. of diversification to his magic for-
Inspired by American mega-investor mula, targeting a mix of companies
Warren Buffet, Joel improved upon and industries that would be more
the model by adding a second crite- durable in the face of changing mar-
rion: The asset had to show the ket conditions. Unsurprisingly, the
potential for growth, using metrics magic formula has become a
like return on capital. much-followed investment practice.

“People often call this way of

thinking ‘growth investing.’ But
there’s only one type of investing:
Figure out what something’s
worth and pay less.”
­—JOEL

11 
 Potential
increase in
market value

Underlying
value

Market
value

By buying cheap assets with solid growth

potential, investors can increase their
margin of safety—i.e. the buffer between
market value and underlying value.

12
 MEET

BENJAMIN GRAHAM
Forefather of value investing, progenitor of Mr. Market

Although he would go on to write To explain this new concept,

his name in the investor firmament, Graham dreamed up an archetype
Benjamin Graham came from humble named Mr. Market: an investor who
beginnings. In 1903, when he was a tends to forget that markets can be
nine-year-old kid living in New York fickle (as Graham’s mother learned)
(having been born in London, and unmoored from underlying
England, as Benjamin Grossbaum), value. Mr. Market was—and is—too
his father died and the family went caught up in the whirlwind to realize
broke. A few years later his mother that, if you can discern the true value
borrowed money—on margin of a stock, you can turn a profit. In
(investing more than she actually 1925, for example, Graham rummaged
had)—to trade stocks. These invest- through reports and discovered that
ments then tanked in a 1907 market an oil company whose stock traded
crash, plunging the family further at $65 happened to hold $80 per
into poverty. share in bonds alone. He bought
This was an early lesson for shares and later sold them for $110.
Graham on the stock market’s Graham knew it was tough to beat
whims. He would later graduate with the market this way. As he wrote in
honors from Columbia University his classic book The Intelligent Investor,
and start working on Wall Street—a “The proportion of smart people
cluster of financial operations in who try this and fail is surprisingly
downtown New York City—for $12 large.” But investors like Joel prove
per week. Soon his job was to ana- that its precepts are still relevant today.
lyze companies. He was good at it;
brilliant, even. He began teaching
investing at Columbia. His principles
of patience and sober analysis gained
admirers like Warren Buffett, a star
pupil and, later, one of the world’s
most successful investors. Graham
came to be known as the forefather
of a new financial concept called
value investing—a term for which he
would share credit with fellow
Columbia scholar David L. Dodd.

13 
 “The biggest edge that people
can have is patience.”—JOEL
MONEY What it means: Market performance is driven in large part by instant reactions to the
TALKS news. By maintaining an outlook that spans years instead of days, you can sidestep
opportunities that look promising in the moment and tank as soon as you’ve bought in.
As an individual investor, you are not required to show daily or monthly gains, which
means you’re free to tune out the noise. Joel considers this to be your advantage, as
“patience will be the last man standing.”
 CASE STUDY

THE DOT-COM
BUBBLE
Tuning out hype can be excruciating—especially
when it keeps getting louder

In the late 1990s, the stock prices of 1999 the California-based company’s
early dot-com businesses such as stock price was $34 per share, based
Pets.com, AOL.com, and Webvan.com mostly on the hope that it would
soared. The tech-heavy Nasdaq index one day have value. But it never did.
jumped from under 800 in 1994 to Webvan hired a fleet of vans to deliver
over 5,000 in the year 2000, yielding milk and bread and tomatoes to cus-
an eye-popping return of more than tomers—and suffered catastrophic
525 percent. Internet-happy investors losses in 2000. It laid off thousands
were getting rich. of employees, and by 2001 the stock
Joel was not one of them. As a was worth less than a nickel.
value investor, he stuck with indus- Webvan is a perfect example of
tries that he could deeply under- the dot-com bubble and bust. The
stand—and from outside the circus “value” was never real; it was fueled
of hype, it was hard to make sense by hype and hope. Joel had sensed
of the lofty dot-com prices. “Mr. this. And from 2000 to 2001, the
Market was smitten with the new Nasdaq crashed by 74 percent in one
internet,” Joel says, so he focused of the bloodiest routs in financial
on tried-and-true assets. history. Meanwhile, Joel outper-
That strategy can test your forti- formed the market by a wide margin,
tude. “It’s hard to think you’re right in essence getting rewarded for
when the market is saying you’re sticking to his investment principles.
not,” says Joel. He underperformed
the market during this period, but he
maintained his principles—for a
year, then a second year, then a third.
It was painful.
Remember Webvan.com? Most
people don’t. It was an early precursor
to food-delivery apps like Instacart,
Postmates, and Uber Eats, and in

15 
 AS SIGNMENT

CLOSING BELL QUIZ

How much of Joel’s episode (and this guide) have you absorbed?
Try this quiz and find the answers on the back page

1. J oel’s magic formula, in broad strokes, consists of three criteria:

Buy assets that are , , and .

2.  , the 1949 book by Benjamin Graham, is considered the

bible of value investing.

3. C
 omplete this Benjamin Graham quote: “The proportion of smart people
who try [value investing] and fail is surprisingly .”

4. M
 r. Market is primarily interested in -term investing
opportunities.

5. D
 uring the dot-com bubble, the much-hyped food delivery company
Webvan traded on the tech-heavy index.

6. W
 hen the bubble burst, Webvan’s stock price sank below .

7. A
 dherents of the method, famously used by Warren Buffett,
aim to buy stocks that they can keep for years.

8. P
 ractitioners of , on the other hand, tend to hold stocks for
a period of days or weeks or months.

9. T
 o calculate a company’s market capitalization, multiply the
by the .

10. Joel sees as “the biggest edge that people can have.”

17 
JOEL’S READING LIST
1

The Essays of Warren Buffett:

Lessons for Corporate America
by Warren Buffett; selected,
arranged, and introduced by
Lawrence A. Cunningham

Contrarian Investment
Strategy: The Psychology of
Stock-Market Success
by David Dreman

Security Analysis 1 2
by Benjamin Graham and
David L. Dodd

The Only Investment Guide

You’ll Ever Need
by Andrew Tobias

The Intelligent Investor

by Benjamin Graham

Money Masters of Our Time

(first edition)
by John Train

3 4

• Joel’s hedge fund, Gotham Capital, helped bankroll the launch of

another hedge fund in 2000: Scion Capital, from a physician who liked
MOVIE to invest at night. The physician’s name was Dr. Michael Burry. Burry
did the math and predicted the subprime mortgage crisis, betting that
MOGULS he could profit by shorting the market. You might know him as English
actor Christian Bale’s character in the 2015 movie The Big Short.

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 CREDITS
Cover of The Little Book That Beats the Market
Title: The Little Book That Beats the Market
Author: Joel Greenblatt
Date: 2005. Publisher: John Wiley & Sons Limited

Images of Benjamin Graham and David L. Dodd

University Archives, Rare Book & Manuscript Library
Columbia University Libraries

Images from the film The Big Short

Everett Collection

Headline from The New York Times

The New York Times © 2014
All rights reserved. Used under license

Image of Alfred W. Jones

Photography by Fabian Bachrach ©

Stock footage
Periscope Film, A/V Geeks, Prelinger Archives, and Pond5

Various images
Getty Images and Alamy

The Closing Bell Quiz answers

1. Cheap, good, diversified 2. The Intelligent Investor 3. Large
4. Short 5. Nasdaq 6. Five cents 7. Buy and hold 8. Swing trading
9. Total number of stock shares; price of each share 10. Patience

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