Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations

Chapter 4The Acquirer’s MultipleFair Companies at Wonderful Prices

“Our statistical screens are merely exploiting a group of undervalued stocks that are easily identified and are further protected by strong balance sheets and large asset values. Additionally, because of the depressed nature and liquid make-up of the companies that meet our test criteria, they are often the object of takeover initiatives.”

—Joel Greenblatt, How The Small Investor Beats The Market (1981)

Joel Greenblatt conducted an experiment in 2002 to see if a computer could be taught to invest like Warren Buffett. Greenblatt, a renowned value investor and adjunct professor at the Columbia University Graduate School of Business, has a long history researching and writing about value investment strategies. As a 19-year-old student at the Wharton School he read about Benjamin Graham in an article in Forbes Magazine called “Ben Graham’s Last Will and Testament.”¹ The article described an interview Graham had given to the Financial Analysts Journal months before his death in 1976 in which he had said that he was “no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.” “All that was required,” said Graham, “were a few techniques and simple principles.”² The most important thing was that investors “buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.” ...