Great investing book, but will online money management catch on?
Joel Greenblatt has made it easy to figure out how he invests.
The hedge fund manager, adjunct business professor at Columbia and best-selling investment author wrote a delightfully simple book about it five years ago.
The Little Book That Beats the Market lays out his value investing formula, why it works, and its past track record.
Since then, if you wanted to know which stocks he’d pick, you can, for free, check out his web site MagicFormulaInvesting, where, once your register, you can get a list of stocks that currently meet his criteria.
And now, if you want more guidance and hand-holding, Greenblatt is offering online professional money management.
Since last fall, Greenblatt, who is the managing partner of Gotham Capital, and K. Blake Darcey, who pioneered online brokerage services at DLJ Direct, have been managing money according to Greenblatt’s principles through FormulaInvesting.com. They have amassed $65 million under management since getting started last October. The minimum investment is $25,000.
I chatted with Greenblatt during his recent visit to Miami.
My main question: Since you’ve told everyone how to invest and sold so many books doing so, why does anyone really need you to do it for them?
His answer boils down to: This is not as easy as it looks.
And, to me, it seems the trick his new firm will have to perform is holding on to investors for the long-term. He says this formula is suited only to investors willing to stay with it for three to five years. And for anybody, these have been a tough few years. Their business model hasn't yet lived through a lengthy or severe downturn like the one investors have experience in the last two years.
His strategy, he said, “works over time but it doesn’t always work, so it’s tough to go about it in a disciplined way.” That is, the formula does not do as well as the market in one out of every four years noted in the book. For individual investors, holding on for those not-great years is tough.
Plus, the stocks he picks are out of favor, which calls for a pretty strong belief in the key reasons for why he selects them. If you stuck to the surface, “If you had a little knowledge, if your read the headlines, you wouldn’t want to be in them,” he said.
The way Greenblatt picks stocks is to measure those that have both a high earnings yield – which is a ratio of earnings to the current stock price – and a high return on capital.
Formula Investing’s proposition: For an annual fee of 1 percent, FormulaInvesting will screen the market’s top 20 to 30 stocks according to a combination of those two measures. You can either select investments from that list or Formula Investing will handle the money management for you in a concentrated portfolio.
The industry publication Registered Rep in January reported that critics say his fee is too high, that investors want a face-to-face relationship and historical results don’t predict the future.
And of course, competition is growing online for both investment management advice and portfolio-sharing.
So for the moment, they are counting on the numbers – and Greenblatt’s celebrity-- to bring in the investors. They're also working on rolling out new portfolios for inernational investing this year.
In the ten years ended last Sept. 30, the site claims that its model portfolio – which was focused on the top 20 percent of stocks by the size of their market capitalization -- would have produced an average annual return of 14.5 percent. That was during a period when major market indexes were flat to down slightly.
No doubt we’ll be hearing more about that, as he says he is revising The Little Book That Beats the Market, to reflect these recent turbulent years for stocks.
Harriet Johnson Brackey, the personal finance columnist for the Sun Sentinel, is an award-winning business reporter. Her columns for 2008 were named "The Best in the Business," a national award chosen by her colleagues at the Society of American Business Editors and Writers.
