Part 3/4:
- Greenblatt cautions that market cap-weighted indexes automatically own too much of overvalued stocks and too little of undervalued ones. This can create opportunities for active managers.
Short Selling Challenges
Shorting is very difficult, as overvalued stocks can become even more overvalued. Greenblatt prefers a more diversified, "insurance company" approach to shorting, with small bets across many names.
He avoids using momentum or other quantitative factors to pick shorts, as he wants to understand the fundamental reasons a stock may be overvalued.
The Decline of Public Markets
- Greenblatt is disappointed by the decline in the number of publicly traded companies in the U.S., from around 9,000 when he started to 3,500-4,000 today.