In a Bloomberg interview with host Erik Schatzker, Gotham Asset Management co-chief investment officer Joel Greenblatt talked about his value investing approach.

Greenblatt explained that his firm doesn’t focus on price-earnings ratio but rather on a company’s cash flow—and that they evaluate all S&P 500 companies “bottoms up” using data going back to 1990. He said, “we can actually contextualize where we stand today, according to how we value companies” (using absolute and relative value metrics). These measures, Greenblatt said, show that the market is in the 22nd percentile with respect to price for the period spanning the last 28 years (meaning stocks have been cheaper 78% of the time). By looking back over that period, Greenblatt explains, he is able to see what has happened historically from this same valuation percentile going forward—which is that the market is likely to be “up 4% to 6% over the next year, up 10%to 12% over the next two.”

Greenblatt emphasizes that his firm doesn’t focus on price-earnings ratios but is drawn to companies that “are gushing free cash flow.” With regard to value as a factor, Greenblatt argued that it is typically defined in terms of low price-book and low price-sales but emphasized that his firm doesn’t view it that way. “We look at the cash flow generated by the business,” he asserted.

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