Reprint: Joel Greenblatt: On Index Investing, the Seven Giants, and Long-Short Strategies

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Graham Blank: On Index Investing, the Magnificent Seven, and Long-Short Strategies

Opening: The Market and Patience

Blank tells students in his first class at Columbia University that as long as valuation work is done properly, the market will eventually recognize the judgment. However, he adds that this process may take weeks or even years.

Stocks represent ownership in companies, and the market will ultimately understand their value, even if this process can be very lengthy. He also mentions Buffett's humility, a quality that has helped him become a successful investor and a lesson everyone can learn.

In summary, his investment advice is: find good companies, ensure the purchase price is reasonable, and patiently wait for time to bring self-appreciation.

Global Markets and the Magnificent Seven

Question 1: How do you view the current concentration in the U.S. market and the phenomenon of the "Magnificent Seven"?

Blank points out that in the current market, only about 4% of stocks contribute to all market returns. Regarding the "Magnificent Seven," he believes:

• Challenge of Concentration: With a few top stocks performing exceptionally well, it is not easy to outperform the market average.

• Role of the Law of Large Numbers: Typically, once companies reach a certain scale, growth slows down. However, the internet and network effects have changed this dynamic, allowing some giant companies to continue growing rapidly.

• Valuation and Growth: Growth and value are inseparable. He believes that evaluating companies from a private equity perspective, focusing on cash flow rather than traditional price-to-book or price-to-sales ratios, can better uncover value.

• Uncertainty of the Future: Although these companies currently have moats and competitive advantages, market changes (such as the rise of artificial intelligence) could impact them.

Evolution of Investment Strategies

Question 2: Why shift from concentrated investing to diversification and long-short strategies?

Blank's early investment style was very concentrated, with typically 6 to 8 stocks making up 80% of the portfolio. However, this approach was highly volatile and significantly affected the investor experience.

• Market Performance in 1998-1999:

• In 1998, the S&P 500 index rose 28%, while Blank's portfolio lost 5%.

• In 1999, the S&P rose another 21%, but they made a profit of 10%.

• By 2000, the S&P fell 10%, while their portfolio rose 115% Despite the long-term effectiveness of a concentrated strategy, the volatility is too high. Therefore, he turned to a diversified long-short strategy, covering hundreds of stocks to reduce overall volatility while maintaining a consistent investment philosophy.

Passive Investment vs. Active Management

Question 3: What is your view on the future of passive investment and active management?

• For most people, passive investment (such as index funds) is the best choice. Buffett also advises ordinary investors to choose index funds.

• However, active investment still makes sense in certain areas, especially for under-researched small-cap stocks.

Graham believes that market volatility is a combination of human nature and mathematics. Even with the popularity of passive investment, valuation fluctuations caused by market sentiment will still create opportunities.

Short Selling Strategies and Risk Management

Question 4: Are there still enough short-selling opportunities in the current market?

Graham's short-selling strategy is primarily "point shooting," targeting individual overvalued companies with small positions.

• He views short selling as a form of insurance, reducing the impact of a single stock on the overall portfolio through diversification.

• In practice, they prefer to go long on undervalued companies simultaneously to hedge risks.

The Essence of Value Investing

Question 5: How do you define value investing?

The core of value investing is to buy at a price below intrinsic value. Graham suggests:

• Focus on the Circle of Competence: Investors should concentrate on companies they understand and skip those they do not.

• Dynamic Changes in Margin of Safety: Good companies will grow in value over time, and the margin of safety for investments will actually increase.

Advice for Young Investors

Question 6: How can one learn from mistakes?

He believes that true learning requires practice, gaining experience through enduring moderate losses.

• The investment amount does not need to be too high, but it must be significant enough for the loss to be meaningful.

• He emphasizes that summarizing experiences from mistakes is more important than simply learning from profits.

Common Patterns of Successful Investing

Question 7: What are the commonalities in successful investing?

Graham shared his thought patterns:

• Look for Undervalued Good Companies: Focus on analyzing whether a company has long-term growth potential.

• Long-Term Holding: Truly high-quality companies will see their margin of safety increase over time.

• Patient Waiting: Buying good companies at reasonable prices and holding them long-term is the right path.

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