1/
I’ve been re-reading through Joel Greenblatt’s class notes from his lectures.
Highly recommend for anyone who hasn’t read them. Thanks @FocusedCompound for making it easily accessible.
focusedcompounding.com/wp-content/upl…
I’ve been re-reading through Joel Greenblatt’s class notes from his lectures.
Highly recommend for anyone who hasn’t read them. Thanks @FocusedCompound for making it easily accessible.
focusedcompounding.com/wp-content/upl…
2/
In lecture 3, Greenblatt discusses why value investing works. He brings up the mean reversion of ROE.
Which is something I think most investors don’t consider.
In lecture 3, Greenblatt discusses why value investing works. He brings up the mean reversion of ROE.
Which is something I think most investors don’t consider.
3/
The reasoning for ROE mean reversion is pretty simple. High ROE companies attract competitors that eventually take profits away.
The reasoning for ROE mean reversion is pretty simple. High ROE companies attract competitors that eventually take profits away.
4/
Low ROE companies spend their time improving their business models, creating new products, changing cost structure etc. to improve ROE whilst facing minimal competition.
Low ROE companies spend their time improving their business models, creating new products, changing cost structure etc. to improve ROE whilst facing minimal competition.
5/
Of course you could pick a $GOOGL or $FB that maintain the ROE over time. A company with sustainable competitive advantages.
But that’s obviously hard too find.
Of course you could pick a $GOOGL or $FB that maintain the ROE over time. A company with sustainable competitive advantages.
But that’s obviously hard too find.
6/
A company is more likely to improve their ROE than to maintain a high ROE for decades.
The typical response is ‘we live in a new world’, SaaS companies are different. Which could be partially true.
A company is more likely to improve their ROE than to maintain a high ROE for decades.
The typical response is ‘we live in a new world’, SaaS companies are different. Which could be partially true.
7/
But reversion to the mean has proven true through every cycle, geography, market-cap and industry throughout industry.
It’s the reason a diversified portfolio of ‘value’ works and usually outperforms. Even if that hasn’t been true for the past 10-15 years.
But reversion to the mean has proven true through every cycle, geography, market-cap and industry throughout industry.
It’s the reason a diversified portfolio of ‘value’ works and usually outperforms. Even if that hasn’t been true for the past 10-15 years.
8/
Admittedly I’m a sucker for a sustainable ROE, high quality company with great management and a long runway. And it’s always worth looking for those companies. They just require better analysis.
Admittedly I’m a sucker for a sustainable ROE, high quality company with great management and a long runway. And it’s always worth looking for those companies. They just require better analysis.
*correction* Richard Pzena is making a presentation to the Greenblatt class. So it’s not Joel bringing up those points.
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