Joel Greenblatt on Investing With Your Emotions

Emotional investors overreact to both good and bad news, sending share prices far from their real value. Other investors accelerate the price swings by attempting to anticipate the crowd.

“Prices fluctuate more than values, so therein lies opportunity. Why are prices of each company so variable and volatile compared to the value of companies? People invest with their emotions.”
— Joel Greenblatt

Greenblatt is pointing at something we all feel but often forget. Prices jump and dive with the headlines, but the underlying business don't change overnight. It hasn't suddenly lost its factories, patents, staff,  and customers. It is our fears, greed, and other emotions that move the market.

Greenblatt knows his business. For 10 years, he generated an annualized return of 50% for his investors, or 30% after he took his fees. At that point, he closed his fund to manage just his own money.

“The stock market is the only place where the customers don't buy when the merchandise is on sale.”
— Alexander Green

It’s funny, isn’t it? We clamor for discounts at the mall. But a 30% markdown on a company we liked last month? Suddenly, we wonder if we should be holding its stock at all.

When you measure your investing acumen by how much your portfolio is up or down, it's hard to avoid feeling any price fall as a personal failure.

Of course, not every cheap stock is a good value. Still, the next time I feel afraid of a falling stock, I hope I'll have the presence of mind to ask myself if I am still confident in my estimate of the company's fundamental value. If so, then falling prices give me an opportunity to pick up a bargain.

Want more reflections like this one? Visit www.mydailyoracle.com for anything you may have missed—and watch your inbox for the next post.

And if this resonated, check out Joel Greenblatt’s classic “The Little Book That Still Beats the Market” and Alexander Green’s “The Gone Fishin’ Portfolio.”

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