In an interview with CNBC last week, Joel Greenblatt compared the stock market to a
jar of jelly beans, and I thought the metaphor was particularly apropos.
So, I wanted to share it with you and explain why Greenblatt suggests that stock pickers
can still have an advantage in the market.
Coming up!
Hey there, my name is Stephen Spicer.
It’s my goal to help you invest smarter.
And I tend to agree with Mr. Greenblatt that if you know what you’re looking for and
are disciplined, you can outperform the market over the long run.
That’s one of my goals here with this channel: to help those who are interested in trying
to find those hidden gems know what to look for.
So, if that’s important to you - if you’re interested in knowing where to look for undervalued
stocks - click that subscribe button and the notification bell so that you don’t miss
a thing!
Now, if you’ve been with me for a while, you know who Joel Greenblatt is and you know
that I’m a big fan.
If you’re new here, I have an old video on him that you might find interesting.
And I actually have another video coming out soon about his top holdings today.
When this man speaks, I listen, and here’s why: from 1985 through 2005 his fund averaged
an annualized return of around 40%!
We’ll explore the details of that history more in the next video, but I hope that’s
reason enough for you too to care what he has to say.
Well, in that CNBC interview he was asked about active managers being able to beat the
market over the long run.
As part of his answer, he talked about the jelly beans.
I’m gonna share that with you and then we’ll unpack his answer to this question.
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Now, as I’m sharing this with you, if you like jelly beans, I hope you’ll hit that
like button….
So, he told a story about the time he was explaining the stock market to a group students
at an inner-city high school in New York.
He brought with him a large jar full of jelly beans.
He gave each student a note card and told them to privately do whatever they needed
to, to come up with their best guess for how many jelly beans there actually were in that
jar.
You know the game and I’m sure you’re familiar with some of the strategies - counting
how many lay across the top, figuring out how many rows deep it is… you know.
So, that’s what the kids did.
They all privately wrote down their answers and Greenblatt collected their cards.
Then, he asked them to one by one publicly make a guess.
The students were allowed to change their answers from what they had written on the
note cards if they wanted.
So, one at a time each student, publicly this time, announced their guess to the entire
class.
So, the last kid to go - the 35th student - had already heard 34 other answers.
Greenblatt kept a record of all the guesses.
After they were done, he averaged the answers given both privately (on the note cards) and
publicly.
The actual number of jelly beans was 1,776.
And he said the average provided by the students via the notecards was 1,771.
Yet somehow the average answer provided publicly was only 881.
“The average of the answers given publicly… that’s the stock market,” he told the
students.
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His point is, if you (or an active money manager) can find a way to block out the noise and
just focus on a methodical valuation approach and understanding of what it is you’re looking
at, what it is you’re looking for, you can have an advantage in this market.
That’s why my goal is to share ideas with you, to get your wheels turning, to get you
excited about digging into some stock, but to be careful to not tell you how to invest.
Even though those “stocks to buy” videos and other sorts of “financial porn” perform
way better in the algorithms.
It’s a fine line that I’m still trying to figure out, but with your help, I’m confident
we’ll get there.
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Greenblatt went on to give a real world example of a mutual fund recently that had outperformed
the market over a 10-year span.
Yet, the average investor in that fund, had somehow, amazingly, managed to LOSE an annualized
11%!
The Magellan Fund is probably the quintessential example of this phenomena.
Legendary fund manager, Peter Lynch, averaged the insane annualized return of 29% during
his 13-year tenure (from ‘77-’90).
Yet, somehow, the average investor in that fund, LOST MONEY!
That’s hard to believe, right?!
How you could take an actively-managed fund that you could have just sat tight and averaged
a-near 30% annualized return - how you could that and somehow manage to LOSE!
Well, that’s exactly what the average investor did.
It’s because we as investors tend to enter and exit at all the wrong times - and a deep
dive into the psychology there is an important subject for another time; it’s also one
of my points for why Modern Portfolio Theory - the way everyone tells you to invest - doesn’t
work in practice.
The point, though, is that the cycles of these fund managers - the good ones (and that’s
another challenge, I’d still say that the majority aren’t “good”) but I think
there is enough evidence to suggest that there are some very skilled asset and fund managers
out there - but the cycles of their funds - the ups and downs, the peaks and troughs
- do not necessarily correlate with that of the market or with other funds, in fact, they
almost assuredly don’t.
What that means with regard to the public in the market, is that after a particular
fund has a year or two of underperforming - just like the Magellan Fund did, it DID
have some years like that over that 13-year stretch - as that happens more and more investors
jump ship, all the way through tol the VERY BOTTOM, where more people are leaving than
at any point before.
They’re moving into something else that has been outperforming over the last couple
years - that is, perhaps, approaching its peak, where more people will enter than at
any point before.
That happens: on average more people enter at the peak and more people exit at the bottom
than at any other point in the cycle, which is the exact opposite of what we should be
doing!
That first fund then starts to do better and that fund that everyone moved into starts
to do worse - rinse and repeat.
That’s how the average investor loses SO much.
That’s why, picking funds based on their performance over the last several years (as
Dave Ramsey suggests, for example) doesn’t make sense - it doesn’t work - and that’s
something that’s been researched and proven several times over.
The same thing happens with active managers and passive investing.
Many active managers - like Greenblatts current fund, for example - are not only trying to
outperform right now, during this bull market, but they’re also trying to be well-positioned
so that when the crash does come, they can REALLY outperform over the long run - which,
for most, is what really matters anyway.
And, being positioned and prepared for a crash like that, makes it harder to outperform when
the market’s hot.
But that doesn’t mean it’s not the right thing for them to do for the long run.
And that comes back to my core message, when I talk about in my book how a stock-and-bond-only
portfolio is a potentially ruinous way to invest - despite everything you hear most
advisors and pundits regurgitate…
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So, rather than just investing passively - because that’s what’s hot right now - if you have
any interest at all in learning to invest on your own, (which I assume you do, since
you’re watching this ...since you’re still watching this video) then continue to learn
as much as you possibly can about building out a portfolio that will best protect and
grow your assets no matter what happens in the future.
Even if you’re underperforming in a given year or two or three, that doesn’t mean
you’re doing it wrong.
Just keep learning and growing and doing what makes sense to you, and over the long run
you can put yourself in the best possible position to outperform.
And that’s my goal - to help you on that journey.
So, if you’re not subscribed already, I hope you’ll do so now and click that bell
- I’d love to help however I can.
And if you’re not interested in learning all that on your own - find someone you can
trust to help you manage your money.
Take that decision very seriously - don’t wait until the market is crashing to critically
consider this crucial part of your financial plan!
I wish you all the best.
Take care.