Quantitative Value, + Web Site: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors

CHAPTER 2

A Blueprint to a Better Quantitative Value Strategy

Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

—Warren Buffett,Shareholder Letter, 20001.

Before The Little Book that Beats the Market2. propelled Joel Greenblatt to celebrity-investor status, he was regarded as one of the best “special situations” investors of his generation. Special situations are opportunities created by corporate events like spin-offs, mergers, restructurings, rights offerings, bankruptcies, liquidations, and asset sales. Greenblatt's firm, Gotham Capital, had an astonishing track record in special situations. Greenblatt and his cofounder, Robert Goldstein, compounded Gotham's Capital at a phenomenal 40 percent annually before fees for the 10 years from Gotham's formation in 1985 to its return of outside capital in 1995. After Gotham returned all outside capital, Greenblatt and Goldstein continued to invest their own capital in special situations. In 1999, Greenblatt described the special situation investment strategy responsible for Gotham's outstanding returns in You Can Be a Stock Market Genius.3. The book was Greenblatt's first bestseller. It is now regarded as a classic in the field, and essential reading for any prospective ...