Joel Greenblatt on CNBC

Joel Greenblatt was on CNBC yesterday and said that the stock market is now, as measured by a ratio to free cash flow, in the 95th percentile of cheapness in the past twenty years.  The market is typically up 15-20% a year after this kind of cheapness, and a value portfolio can be up mid-30s percent.

Check out the video here.

Some stocks mentioned are GME, AEO, BBY, MSFT, WFC and HPQ.  He does mention specifically HPQ and WFC.

Joel Greenblatt is a real deal hedge fund manager and not one of those guys that have a lot to say with no track record to speak of. 

At the beginning of the video, it is mentioned that Greenblatt has earned 50%/year returns between 1985 through 1994.  The reason they use that time period is that 1985 is when the hedge fund started, and Greenblatt returned all outside investor capital in January 1995 (and it was not due to poor returns like Steinhardt or Robertson).

Many will say that 1985-1994 was a bull market so it was easy to make money.  Well, I don't know too many people who did that well during that time period so it can't be easy. 

Here are the actual return figures, year-by-year.  The figures are net of expenses, but before incentive fees (hedge funds typically take a 1% or 2% management fee and 20% incentive fee).

                                  Return
1985 (9 months)          +70.4%
1986                            +53.6%
1987                            +29.4%
1988                            +64.4%
1989                            +31.9%
1990                            +31.6%
1991                            +28.5%
1992                            +30.6%
1993                          +115.2%
1994                            +48.9%

Notice that 1987 was the year of black monday and it was a flat year but Greenblatt made +29.4%.  The years 1988-1991 were flattish, with a recession, Iraq war, banking crisis etc...  And yet the performance never slows down.  

In any case, I keep saying that this blog isn't going to be an information aggregation site or fan site of investing superstars, but I will post things when I think it is especially interesting and important. 

It is important to listen really hard to what Greenblatt has to say.  He says that the market is now attractively priced because the news is pretty bad.  This is the same with individual stocks.  When you listen to his picks, people will always say but this, but that, but what about xxx etc...  Actually, those known problems are the reason why stocks trade cheap.  If there aren't any problems, they wouldn't be cheap!

Anyway, when Greenblatt speaks, it's always a good idea to listen!