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My 5 biggest takeaways from a hedge fund manager who averaged 40% returns over 20 years

Updated: Jun 20, 2023

Joel Greenblatt is one of the greatest hedge fund managers of all time.

He averaged returns of 40% a year over 20 years. At this rate, $1 million grows into $836 million.

He is also known for his best-selling classic “The Little Book That Beats The Market”.

Here’re 5 of my BIGGEST takeaways from over 100 HOURS of studying his investing methodology:

1) Take bigger positions in things you can’t lose much money in

Don’t size positions based on how much money you can make. Take bigger positions in things you can’t lose much money in.

Joel Greenblatt had up to 40% in one position, when he found $10 worth of assets selling for $6.

A mistake that people make is finding one of the best things you’ve ever seen, but only putting 1% to 2% of your portfolio into it. That’s like saying I don’t see such a good opportunity very often, but I’m not taking full advantage of it.

“Experience is what you got when you didn’t get what you wanted”.-Howard Marks

Understand that bad things can happen, and prepare to survive another day.

2) View your holdings as businesses, not stocks that you can get quotes on everyday

“I don’t consider 6 to 8 names making up 80% of your portfolio, particularly concentrated. 1 name for your whole portfolio is particularly concentrated”

If you sold your business for $1 million, and had to choose from a few hundred businesses, pick 6 to 8 businesses with the following characteristics:

  • Best price

  • Long runway

  • Well managed.

Divide your investments into businesses, not stock ticker symbols.

Think of them as stocks, not pieces of paper that you are going to get quotes on every day.

Take a 3 to 5 year horizon in owning those 6 to 8 different businesses.

As a businessman who is buying a stake in a company, no one would think you’re crazy. They’d think you’re pretty prudent.

Put a stock price on it everyday, and people change their analysis.

3) The greatest investors tend to have a screw loose.

This is especially true if you have a concentrated portfolio.

You have to have a little bit of a screw loose to take those risks. Get used to Mr. Market kicking you in the stomach.

Emotions are very strong, it’s not possible to completely remove emotions. But we can better manage it.

One of the reasons why you’re able to make money is because the stock market gets emotional sometimes, creating opportunities, along with pain.

Good investors can get kicked in the stomach, but they come back to take advantage of the opportunities that come their way.

4) Know what you own

When you understand what you own and know how to value a business, you’ll be in a better position to manage the maniac that is the stock market.

If something that you think is worth $10 went from $6 to $5, it’s not that concerning.

If you own 6 to 8 great bets, it’s more comforting if you know what you own.

If you understand what you own, and the premise that you bought those things with is still intact, that’s actually the only way I think you can deal with the emotion…because you realise what you own is still good.

5) Play games where you know the rules

To Greenblatt, Bitcoin and gold are speculative. They are not earning any money. It’s a speculation as there is no intelligent way to value them. It has no inherent value.

Greenblatt on Bitcoin:

I feel disciplined I didn’t play.

Stick to investing in things you know. It’s okay to miss out on things you don’t understand. If you can’t figure it out, avoid it.

That said, it’s not crazy to play these games by putting a small portion of your portfolio, and hopefully learn something in the process.

Treat it as “fun money”. Limit this to 1% to 2% of your portfolio, and just have fun with it. It’s like going to the casino, and taking a chance with a small bet, even with the odds stacked against you.

With the other 98% of your portfolio, stay disciplined and do what you know how to do.

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