Tuesday, June 30, 2009

Joel Greenblatt Q & A

Gurufocus posts a good Q&A with remarkably skillful investor, creator of Value Investors Club and all around nice guy Joel Greenblatt. Here are two of the highlights:

Question 10. Could you share your thinking about the relationship among long-term earnings stability, long-term ROE/ROIC and valuation levels (PE, PS)? How do you think about the dynamics of these three variables when valuating a company? (grol1971)

JG: When doing in depth analysis of companies, I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of “normal” earnings power over time. My goal is to buy a company at a low multiple to normal earnings power several years out and that the company earns good returns on capital at that level of normal earnings.

Question 11. What type of things would you look for in an annual report that your typical investor might not pick up on? Do you feel there is a need to do a DCF analysis of a company? (cyrano)

JG: I look for obvious things when looking for bargains, not something terribly obscure. So, if a company has two divisions, one that earns money and one that loses, I might speculate on what the company might be worth without the money losing division, but that wouldn’t involve higher mathematics or special sleuthing talents. A DCF analysis is potentially a useful reality check to see what kind of growth rate, earnings and discount rate would justify the current price. However, I usually just look at a simple multiple to normalized earnings. If I can buy something at a very low multiple and I have confidence in the earnings stream, I don’t have to calculate a DCF to know whether I want to buy it.

[Hat Tip: Manual of Ideas]