Investing in the Risk Arbitrage Business

Today’s conversation is with Joel Greenblatt, Founder and Managing Partner of Gotham Asset Management. Since founding Gotham in 1985, Joel and his partner Robert Goldstein have developed the firm into a large asset management company, well beyond the traditional hedge fund model and offering mutual fund products for the retail investor. Throughout his career, Joel has been a very successful adjunct professor here at Columbia Business School and has also published several successful books.

Growing up, Joel intuitively learned about business from his father, a shoe manufacturer. From these dinner table lessons, his biggest takeaway was the idea that stocks are not simply pieces of paper that bounce around and to remember you own a piece of a business. After completing his MBA at Wharton School of the University of Pennsylvania, Joel started his investment career and quickly progressed from analyst to partner, and soon started Gotham where he has successfully bridged theory and practice for over 30 years.

On this episode, Joel and I talk about his introduction to Ben Graham and value investing, why he switched from law school to a career in the investment world, his early role in risk arbitrage, why he decided to start his firm, how he turned a tough negotiation with Mike Milken into a win for Gotham, why he advocates for a value-based approach to investing, and so much more!

Key Topics:

• What Joel learned from his father about business (2:46)
• How Joel developed his core perspective on investing (3:13)
• Why Ben Graham’s stock-picking rules resonated with Joel (4:35)
• How Joel ended up writing an article for the Journal of Portfolio Management while a student at Wharton (5:51)
• How trading options at Bear Stearns helped Joel realize he wanted to pursue an investment-related career (7:23)
• Joel’s experience as the only analyst at a startup hedge fund (7:58)
• Why Joel’s early role in risk arbitrage was a good foundation for his Special Situations course at the Heilbrunn Center (9:28)
• The lucky situation Joel found himself in when he went to Wall Street (10:51)
• Why Joel decided to start his firm (12:26)
• Joel’s tough negotiation with Mike Milken (13:17)
• The influences that shaped Joel’s initial investment approach at Gotham (15:01)
• How Joel succeeds without specializing (19:09)
• The advantage of investing off the beating path (19:41)
• Why Joel decided to become an author (23:29)
• How writing and teaching have helped Joel become a better investor (24:23)
• Why it returned the outside capital from Gotham (25:38)
• Joel’s investment philosophy (28:02)
• Joel’s career-long rebellion against the efficient market hypothesis and portfolio management theory (28:49)
• The fascinating results from Joel’s benevolent brokerage firm (35:11)
• Why the strategy from The Little Book That Still Beats the Market can be difficult readers to implement (37:48)
• Why Joel advocates for a valuation-based approach to investing (42:14)
• The prudent approach most people should take when investing in the market (48:22)
• And much more!

Mentioned in this Episode:

• Gotham Asset Management
• Joel Greenblatt’s Books:
  • The Little Book That Still Beats the Market
  • The Big Secret for the Small Investor - A New Route to Long-Term Investment Success
  • You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
• Joel Greenblatt’s Journal of Portfolio Management Article | How the small investor can beat the market
• Malcolm Gladwell’s Book | Outliers: The Story of Success
• Mike Milken, Financier
• Benjamin Graham and David L. Dodd’s Book | Security Analysis
• Benjamin Graham’s Book | The Intelligent Investor
• Warren Buffet’s Shareholder Letters
• John Train’s Books
• David Dreman’s Books
• Joel Greenblatt’s Morningstar Paper | Adding Your Two Cents May Cost a Lot Over the Long Term
• Cliff Asness, Managing and Founding Principal of AQR Capital Managements

Thanks for Listening!

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