Quick follow up post to yesterday's post:
I was just thinking that in the context of Marks’ last letter to Oaktree shareholders (It’s Not Easy), that Greenblatt’s Little Book makes it all sound too easy, and we all know it’s not easy (sorry for the repetition).
Greenblatt’s book makes it sound as if running a screen and throwing darts is a one way ticket to alpha. Just run screen once a year, throw 20 or 30 darts, hold for a year, re-run screen next year, turn portfolio over, repeat. By the 2nd or 3rd year, you will have your alpha.
So here are my thoughts:
- The book was published in 2005
- The follow up was published in 2007
- If he was running his system for any period of time before 2005, it probably worked
- Once he published the book, lots and lots of smart people read it. Over time, these smart people figured out a way to replicate the screens. Greenblatt even hosts the screen results at magicformulainvesting.com, so anyone can just run the screen without their own research, and throw 20 darts with his published results
- By virtue of convincing the market that his ranking system worked, lots and lots of people ended up running the system as we know that the institutional imperative is to generate alpha
When all this money started chasing the same stocks, they got bid, so really, what was left in the screen either had no real advantage as everyone owned the same stocks, or it was toxic waste. As a result, any advantage has probably been arbitraged away over time
This doesn’t mean the screen isn’t a good starting point for additional research, but the additional research has to take the screen results and cut the results to shreds before throwing a single dart.
In any case, I'm absolutely curious to see how the results from Friday's screen perform over a 1 year holding period and I'll chime in every now and again to check up on my 20 darts.