Longtime bargain hunter Joel Greenblatt doesn’t think his value investment is worthy of a bad rap. The 67-year-old investor who currently runs Gotham Asset Management believes that traditional standards that define “value” such as price-to-sell ratios do not necessarily represent the essence of philosophy. “We are very cash flow oriented… Morningstar or Russell’s classification value is not the way we see value,” Greenblatt told the Value Investment Conference in New York on Wednesday. “We literally value our business, like private equity investors who buy the entire business.” With the most commonly used measurements, value stock has been crushed by growth counterparts over the past 20 years. The Russell 1000 value index has grown 189% over the past 20 years, including stocks with a low price-to-book ratio and low sales per share, while the growth stock response has increased by nearly 700%. In the recovery after the 2008 financial crisis, growth stocks took over market leadership and enjoyed uninterrupted expansion in the subsequent decade of bull run. The major shift to passive investment using index funds and ETFs further fueled the rise of the growth name meteor. Many traditional value investors found themselves in a desperate place as cheap stocks suffered from massive unperformance. Still, Greenblatt, who taught value investment classes at Columbia University for over 20 years, said veteran players who look at hidden gems can still perform better than the wider market. “We’re all going to insist for a moment that beating the market is difficult for an active manager, and I’m not going to be a challenge,” he said. “I think the market is emotional. [a] A very disciplined value investor means that the business is worth it or pays a reasonable or low price, and the market can still do it to give you that gift and buy something a little cheaper than it is worth it. Wharton School at the University of Pennsylvania says it is “unusual” as the largest stocks outperform the market significantly over the last 10-15 years.
