I spent a period of time devouring everything Joel Greenblatt wrote or shared about investing. Mr. Greenblatt is a manager of Gotham Funds who shares his knowledge liberally through writing, speaking, and teaching. I discovered him through his book “You Can Be a Stockmarket Genius.” I also watched dozens of interviews. I might have had a man crush. He is a clear thinker on investing topics; he is also very articulate and simplifies complex topics. And he seems like a nice guy. Someone I would enjoy having a coffee with.
One of the resources I found was his lecture notes from when he taught investing at Columbia University. They are gold. A big “thank you” to Geoff Gannon - currently of Focussed Compounding fame - who I believe posted the notes for me to find way back when. (BTW: Focussed Compounding is a great resource, and Geoff and his partner Andrew Kuhn are great teachers. I love their podcast and deep thinking on investing). These notes were open on my computer constantly for a year or more. Whenever I had a spare moment, I would dip in and read a little. I re-read some of them, preparing for writing this newsletter - still gold. (Here’s the Focussed Compounding link to the notes.) I found these so helpful because they referenced recent examples of companies that I knew.
Communication and understanding can be messy things. In many of his interviews and writings, Greenblatt says something to the effect of: “If you do good valuation work, then eventually the market will recognize it and reward you. I don’t know when it will happen: six months, a year, or two years. But if you do good work, you will be rewarded.” Somehow, I took something different away from his statement. What I thought I heard was: “You can value anything.” To be clear, this is not what he said. And to this day, I cannot figure out why I walked away with that impression from him. He says almost the opposite several times. He is an advocate of staying strictly in your circle of competence. He clearly believes that there are things an individual cannot analyze appropriately.
Nevertheless, for roughly a year, I felt like Greenblatt told me I could value anything. And so that is what I tried to do. Pre-revenue start-up: I can value it. Insurance company in runoff: I can value it. Microcap oil exploration company: I can value it. Now, to my credit, I learned that there were things that I had no idea how to value. Still, I thought that someone with more expertise could value it. I labored under the illusion that every company had a discernable value that you could calculate, so I tried to value them.
It was an interesting exercise.
I learned a lot when I assumed that I could value anything. For example, thinking about how a pre-revenue company might be valued led me to explore the market in which it operated. I looked at the total addressable market (TAM) and tried to determine how much of it they could take. I looked at other companies that had ramped from zero revenue to see how their revenue and profitability built over time. And ultimately, I built a model that provided a value estimate for the company. Now many of these models proved completely useless. There were too many assumptions with broad potential outcomes to model accurately. But some proved to be unexpectedly useful.
I’ll use Pinterest (PINS) as an example. Before it went public, I analyzed the company based on its registration statement. I came up with a valuation model based on what I felt were reasonable assumptions. When I cranked through my bear-to-bull cases for the company, I decided it was worth between $20 and $200. This is a laughably large rage. It would almost certainly be useless, right? Well, it turns out that when PINS went public, it traded down to a low of $12. It was well within a value that my analysis would have shown a reasonable margin of safety. After that, it continued to run up to the mid 80’s. It dropped since then and currently trades in the mid 20’s. I did not have the courage of my convictions, and I never bought it near its lows - or at all, for that matter.
I misunderstood Joel Greenblatt’s teachings. But the exercise of thinking I could value anything, and jumping in assuming that there was a value I could uncover, was very instructive to me. I made a mistake in interpreting his teachings. But the lessons remain.