"90% Choose the Wrong Portfolio Strategy" - Joel Greenblatt | Stocks | Investment

Added: 2026-06-02

[00:00:00]From 1985 to 1995, you did run a very tightly focused hedge fund, which you then closed in 1995 and returned the money to investors that had 34% annualized returns. But it was you said it was just too difficult.

[00:00:17]>> Uh there were a lot of reasons why we returned outside capital. We didn't close the fund. We continued to run our internal selves our capital thereafter.

[00:00:26]One of the issues and Warren Buffett always says fat wallet is the enemy of high investment returns. And with a very concentrated portfolio and in that portfolio 80% of our portfolio was generally in six to eight names. We were finding our very favorite things. Uh but that's also very volatile when one or two of those names aren't doing well for a short period of time either because we were wrong or because our hypothesis just need a little more time to play out. And there were periods of uh of sharp drops even though the long-term record was >> excellent.

[00:01:00]>> Right.

[00:01:01]>> But as we were successful that period of time, we collected more money and we thought we could continue to get very high returns with less money. So we we did that. Another way to >> And and Joel, have you continued that with with Rob Goldstein or is are you still doing that great >> that for over a decade after we returned money and we developed these more diversified strategies that we found both enjoyable to run our own money and most of our money is invested in these more diversified strategies. But in in contrast to a very select portfolio, we're doing more using our valuation skills in a more diverse universe and we have a lot less issues with two or three days where one or two names are particularly hurting us. It's easier for people to stay with than I would just guess Index Plus would be another iteration of that.

[00:02:03]Even a more diversified strategy when you're really picking uh the cheapest, which are out of favor, and the most expensive, which are truly in favor, uh some of those uh divergences last longer than most people's patience last. And so, this was our way of really narrowing that uh waiting uh to to come close to the index. Doesn't make one better than the other. Doesn't mean concentrated investing is better than diversified investing, which is better than what we're doing in Index Plus, which is something that's going to hug the index a little bit more than uh you know, the fully active part of our strategy.

[00:02:41]There're different ways to skin the cat.

[00:02:43]And so, what I started uh saying when I I put together the piece that I wrote uh introduce Index Plus was the strategy that's best for you is not only one that makes sense, but one you can stick with.

[00:02:58]>> A strategy that makes sense and that you can stick with. A lot of people have decided that that strategy is going to be index funds. And and a lot of people are invested in just the S&P 500 index fund.

[00:03:11]But again, in the past uh at a past interview with me, you were critical of the market capitalization weighted index fund. Is there a Is there a better strategy? I mean, there's you know, there are equal weight index funds for the S&P 500 for instance. There are fundamentally weighted um you know, index funds now. Are you know, are those the a better way to go so that we're not again paying up for the most expensive companies all the time?

[00:03:42]>> Sure. Long-term uh you know, there's been plenty of studies and we've done the studies ourselves.

[00:03:48]And whether you do an equal What What happens in a market cap weighted just to review, is that if a company is overpriced, uh because you're basically on price, you by definition own too much of that company.

[00:04:01]>> Right.

[00:04:01]>> If a company is bargain priced, uh it because you're investing by price, you by definition own too little. In a market cap weighted index, you're sort of step on every crack and and you make every mistake possible.

[00:04:14]Even if you don't know which are overpriced, which are underpriced, you know if it's overpriced, you own too much. If it's underpriced, you own too little. That's what you do know. So, one way to avoid that is to make random errors. So, random errors would be uh an equally weighted index. Sometimes you own too expensive ones, sometimes uh cheap ones, but on average, you're making random errors.

[00:04:36]You get the 2% back it costs you uh to make mistakes every single time.

[00:04:42]Uh and some of the fundamental weighted index, uh if they charge low enough prices, uh also avoid that in another way. Both over time will uh outperform uh the market cap weighted index. On the other hand, uh they do zig and zag differently uh than the market cap weighted index, and there'll be periods where the market cap weighted index, even 3-4 year periods, where that outperforms. So, they still have tracking error less, but uh if I were uh advising uh my mother or my sister or someone like that, I would tell them to use either an equally weighted and and some of the fundame- fundamentally weighted indexes. They're also, if you do it in the form of an ETF, you get tax benefits uh a little bit more in uh where you don't have to pay interim taxes other than for dividends, just only when you buy and sell. And if you use an ETF properly, in my mind, you're a long-term holder.

[00:05:43]>> Many investors believe that the only way to beat the market is by holding a highly concentrated portfolio [music] of just few stocks.

[00:05:50]But legendary investor Joel Greenblatt disagrees.

[00:05:53]Greenblatt says that there are many ways to succeed in investing.

[00:05:57]Concentrated portfolio can work, but diversified portfolio, index funds, and even hedge fund strategies can also create enormous wealth over time.

[00:06:05]He says the key is not finding the perfect strategy.

[00:06:08]The key is finding a strategy that matches your personality and that you can stick with during market volatility.

[00:06:14]When it comes to me, I used to believe that a very concentrated portfolio was the best path to higher returns.

[00:06:20]But over time, I realized that diversification can help reduce risk without necessarily sacrificing long-term performance.

[00:06:26]Today, my portfolio is spread across six to eight stocks with a small allocation to gold ETFs >> [music] >> and REITs for additional diversification. So, remember, the best portfolio isn't the one looks smartest on the paper.

[00:06:39]It's the one you can confidently hold through both bull and bear markets.