Joel Greenblatt

The Billionaire Who Gave It All Back

In January 1995, Joel Greenblatt fired his best clients.

After a decade of 50% annual returns, turning every $10,000 into $1 million, the 37-year-old hedge fund manager returned $500 million to investors and closed Gotham Capital to outsiders. Wall Street was baffled. In finance, you're supposed to raise more money when you're winning, not give it back.

Twenty-nine years later, Greenblatt manages $6.3 billion and has influenced more investors than almost anyone alive.

His story contains three lessons that challenge everything we think we know about success.

Lesson 1: Small is beautiful (and profitable)

Greenblatt discovered the inverse relationship between size and returns in 1985, when he started Gotham Capital with $7 million, mostly from junk-bond king Michael Milken. His edge wasn't genius. It was focus.

He specialised in situations other investors ignored: spinoffs trading at 3x earnings, merger arbitrage with 40% spreads, companies emerging from bankruptcy at massive discounts.

One early win: buying stock in a company that owned both Marriott hotels and Host Marriott REIT during their spinoff. The complexity scared away most investors. Greenblatt saw value.

The math is brutal for large funds:

• Managing $10 million, you can invest in 500+ opportunities

• Managing $1 billion, maybe 50

• Managing $10 billion, perhaps 20

His returns proved it: 50% annually before fees from 1985-1994. After fees? Still 30% net to investors.

Yet every fund manager chases size because fees are based on assets, not performance. A $10 billion fund earning 2% management fees collects $200 million just for showing up. Mediocre returns? Who cares, you're already rich.

This is a well-known principle of fund management: It's better to be big and bad than small and good. The ideal fund size is 'as large as possible,' and the ideal return is 'not so terrible that everyone leaves.'

Greenblatt chose differently.

When his fund hit $500 million and returns started declining from 50% toward "just" 30%, he pulled the plug. He spent the next decade managing only his own money, turning his attention to a bigger challenge.

Lesson 2: Simplicity scales, complexity doesn't

During his sabbatical from outside investors, Greenblatt developed what he called the "Magic Formula", though he'd be first to admit there's nothing magical about it.

The formula ranks every stock by two metrics:

1. Earnings yield: How much the business earns relative to what you pay (EBIT/Enterprise Value)

2. Return on capital: How efficiently the business uses its money (EBIT/Net Working Capital + Net Fixed Assets)

Combine the rankings.

Buy the top 20-30 stocks.

Hold for a year.

Repeat.

A sixth-grader could execute it(!) Which is precisely why Greenblatt wrote "The Little Book That Beats the Market" (2005) using "6th grade math, plain language and humour." His five children were his test audience, if they couldn't understand it, he rewrote it.

Most investment strategies require a PhD to understand and … well, they still don't really work. Greenblatt's requires elementary school math and does work. The finance industry has spent decades pretending not to notice this.

And what were the results? From 1988-2004, this kindergarten strategy returned 30.8% annually versus the market's 12.4%.

Of course, skeptics emerged immediately. Too simple. Too good to be true. Must be data mining.

Then independent researchers tested it globally:

• Europe: Outperformed by 5.5% annually

• India: Beat the market by 4.7% yearly

• Hong Kong, South Korea, Japan: All showed significant outperformance

Even after the formula became public, it kept working. From 2003-2015, it generated 11.4% annual returns versus the market's 8.7%. Not the spectacular 30% of the backtest, but still beating 90% of professional managers.

Why does something so simple work?

Because humans are predictably irrational. During the 2008 crisis, great companies traded at ridiculous prices because investors panicked. The formula bought Microsoft at 8x earnings. Exxon at 6x. Johnson & Johnson at 11x. No emotion. No second-guessing. Just math.

Lesson 3: Teaching multiplies wealth

When Greenblatt returned to managing outside money in 2008, he'd transformed. The old Greenblatt found one brilliant investment at a time through hundreds of hours of research. The new Greenblatt systematised everything.

He wrote four books, but not typical investment books. "You Can Be a Stock Market Genius" (1997) reads like a detective novel where the mystery is finding 50-cent dollars. His favourite example: When Marriott split into two companies, the hotel management company got all the attention while the real estate trust, trading at a massive discount, was ignored. Classic Greenblatt.

At Columbia Business School, where he's taught "Value and Special Situation Investing" for over 20 years, he brings in practitioners, real investors managing real money, every week. Students learn that David Einhorn shorts stocks differently than Seth Klarman buys distressed debt, but both make fortunes.

His most exclusive creation is the Value Investors Club, co-founded in 1999 with John Petry. Membership is capped at 250. To join, you must submit professional-grade investment analyses. The best ideas win $5,000 bimonthly. It's a social network where you pay people to share trade secrets with their competitors. In any other industry, this would be called 'industrial espionage.' In finance, it's called 'thought leadership.' Academic studies confirm VIC recommendations generate "significant abnormal profits."

One member he influenced early: Michael Burry. Greenblatt invested $1 million in Burry's Scion Capital in 2000. By 2006, it had grown to $100 million. Burry later made $800 million betting against subprime mortgages, using the same contrarian, value-focused approach Greenblatt taught.

The Greenblatt Paradox

In 2006, Greenblatt applied his investment philosophy to education. He co-founded what became Success Academy Charter Schools with a $2.5 million donation. The approach was pure Greenblatt: measure everything, demand results, scale what works.

Today, Success Academy operates 57 schools serving 22,000 students. For eight consecutive years, 100% of graduates have been accepted to college. These are kids from Central Harlem and the South Bronx, outperforming students from Manhattan's elite prep schools. Huh.

His investment approach, buying quality assets at discount prices, applied perfectly to human capital. Talented kids from poor neighbourhoods were massively undervalued by the education system. Greenblatt saw arbitrage.

If you think about it, children are just a very illiquid small-cap investment with a 20-year holding period. And yes, the fact that this sentence makes sense tells you everything about how finance people see the world.

Wall Street celebrates giants who manage hundreds of billions poorly. Renaissance Technologies won't share its methods. Warren Buffett's letters are deliberately vague about specifics. Greenblatt chose radical transparency.

His books have sold over 300,000 copies. If each reader manages just $100,000 using his methods, that's $30 billion influenced, five times what he manages directly. But the real multiplier is institutional. Gotham Asset Management now runs multiple funds using systematic value strategies. Hundreds of funds worldwide have adapted the Magic Formula. Business schools teach his cases.

The Bottom Line

At 67, Greenblatt still teaches at Columbia, still manages billions, still searches for value in unfashionable places. His Gotham Large Value Fund has lagged the S&P 500 recently, 9.15% versus 12.31% over five years. Critics say value investing is dead, killed by algorithms and indexing.

Greenblatt disagrees.

Markets are more efficient at processing information, but not at controlling emotion. Humans still panic in crises and chase bubbles in booms. The patient investor who buys quality businesses at reasonable prices will always have an edge.

His greatest insight wasn't the Magic Formula or special situations or even those legendary 50% returns. It was recognising that the best investment compounds forever: knowledge.

Figure out what something is worth, a stock, a career, a life, and pay a lot less. Then teach others to do the same.

The returns, inevitably, follow.