Joel Greenblatt: One Bubble After Another

Joel Greenblatt, of Gotham Asset Management, spoke at the Ira Sohn Conference yesterday, and said that we have been in one continuing bubble since 2000, just different kinds of bubbles.

Since 2000, we have experienced the Internet bubble, which led to the NASDAQ crashing some 50%, of which it still has not recovered these levels. In 2004, the housing bubble had home prices rising 10% every year, and the housing sector continues to remain in the doldrums today, although there are some bright spots occurring around the country. The last bubble is the one we are currently in, which is federal government supported, as massive amounts of fiscal and monetary stimulus are being thrown at us.

He discussed market inefficiencies, particularly in the S&P 500. Over the past 20 years, the S&P has returned 9.1%, but since it is market-cap weighted, this is not the most efficient way to do things. An equal weighted S&P returned 11.8% over the past 20 years. An index that was created, called the FTSE Rafi 1000 index had a compound annual growth rate of 12.2% over 20 years. The index was based on companies that larger sales, more cash were weighted more heavily, it was not price weighted.

The last index was a Value Weighted Index, which uses 800-1000 stocks, and used the same metrics as in his book. Over 20 years, it returned 16.1%, and had a beta of 1.01 relative to the Russel 1000, and had a standard deviation of 19.9%.

Greenblatt gave some actionable ideas, mostly in the consumer discretionary and pharmaceutical industries.

He mentioned he likes Wellpoint (NYSE: WLP), AMERIGROUP Corporation (NYSE: AGP), Aetna (NYSE: AET), Humana (NYSE: HUM), GameStop Corp. (NYSE: GME), Walgreen Company (NYSE: WAG), Bed Bath & Beyond Inc. (NASDAQ: BBBY), Nordstrom, Inc. (NYSE: JWN), Williams-Sonoma, Inc. (NYSE: WSM), Intel Corporation (NASDAQ: INTC), Merck & Co., Inc. (NYSE: MRK) and Abbott Laboratories (NYSE: ABT).

Greenblatt said the world is much more institutionalized then it ever has been, and time frames have gotten shorter. He concluded by recommending the investors take advantage of a longer term horizon, which has continued to grown over the years.