The history of his Gotham Capital fund started in 1985 and stopped abruptly in 1994, the average annual compound yield was exactly 50% (before the incentive fees), his superior performance was remarkably consistent, the annual yield lowest throughout the 10-year period was positive 28.5%, one of the best background I’ve ever seen. Why, I was wondering, would someone close a fund that was very good?
As in his books it was clear that Greenblatt remained active in the markets, he could not even guess a plausible explanation for closing the fund, the obvious logical answer, Greenblatt closed his fund precisely because it did so well, assets had grown to the point in which they prevented to increase the yield, reason why Greenblatt decided to return all the money of the investors. Greenblatt, together with Rob Goldstein, its partner since 1989, continued to trade the Gotham Capital account with its own capital for more than a decade, using the same concentrated portfolio of special operations in the fund, the types of transactions detailed by Greenblatt. Returns from this account are not available, they are out of the registry, Greenblatt said that the average return on the account after the return of money from the investors of Gotham Capital, continued to perform extremely well (much better than the vast majority of hedge funds), although it does not come close to the high average performance of the canceled fund.
Greenblatt’s second book, “The Little Book That Beats the Market”, is not limited when it comes to titles arising from a research project, in 2003, hired a programmer to test how two key metrics that together were representative of their investment selection criteria, choosing companies that were cheap and good actually made in the markets. Greenblatt used the return on profits to represent the price decline and the return on capital to represent its value, the two measures were combined into a single indicator that worked even better than Greenblatt and Goldstein expected.
Greenblatt called this combined classification indicator the magic formula, a name that implicitly mocks the enthusiasm that accompanies market indicators, but also recognizes the surprising effectiveness of the measure (as empirically demonstrated), in fact, Greenblatt and Goldstein They were so impressed with the Magic Formula that they created a self-titled website to use as a basis to manage stock portfolios.
Originally posted 2020-10-20 05:34:07.