Common Sense, by Joel Greenblatt (introduction)

N S O E M N M S O E C The I NVESTOR’S G UIDE to E QUALITY O PPORTUNITY and G ROWTH

JOEL GREENBLATT Author of the New York Times best seller

THE LITTLE BOOK THAT BEATS THE MARKET

INTRODUCTION

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n the 2005 movie Fever Pitch, a school teacher and rabid baseball fan, played by Jimmy Fallon, tries to explain to his new girlfriend why he’s spending Easter vacation at spring training with the Boston Red Sox. “Oh,” the girlfriend (played by Drew Barrymore) says, “you get to train with the Red Sox? Are you allowed to do that?”

“Well, we don’t actually . . . we watch the games.”

“Aren’t those just practice games?” she asks.

“Yeah, yeah, but there’s more to it than that. We scout the players. We—we say which players they should keep . . . which they should get rid of.”

“And the Red Sox ask your opinion?”

“Well, not yet. But if they ever do, uh . . .”

IN T RODUCT ION

To be clear, no one’s asking my opinion. The Red Sox haven’t called and neither has anyone else. Yet, this is a book with lots of opinions on which policies our nation should keep (and possibly expand) and which we should get rid of (or at least change)—especially if we want to continue growing the pie while achieving more equality and opportunity for all of our citizens. Typically, a book like this would be written by someone else—maybe a politician or a journalist, or perhaps an economist or academic. But I’m none of the above. My perspective is a bit different.

I’m a professional investment manager and businessman.

In a sense, I’m just a guy sitting in the cheap seats. My main skill set involves doing research and then trying to figure out which business models make sense and which ones don’t.

Though I have a long-term record that indicates I’m pretty good at that task, I’m still wrong an awful lot. Maybe you shouldn’t really care what I think.

Still, I can’t help having opinions, and yelling at the newspaper hasn’t been very productive. Then again, the Moneyball-like analytics that now dominate decisions at virtually every major league sports team actually originated from the ideas of fans literally sitting in the stands—not from the experienced sports executives sitting in team offices.

Of course, that proves nothing—other than approaching issues from a diversity of perspectives and backgrounds can sometimes be helpful.

Though I’ve worked in education reform for the last twenty- five years and even helped start one of the largest 2

IN T RODUCT ION

charter school networks in the country, I’m not a professional educator. But nearly everyone agrees that true equality starts with a good education. So, it should be troubling that our education system is literally designed to be unequal from the start. Yet, as an investor, it’s hard to imagine a bigger payoff than successfully teaching children how to fish.

Bill Gates has called education reform more difficult than eradicating polio, malaria, or tuberculosis. While much of what I write is disturbing, I have some thoughts on how we can work around the current system to create real opportunity for students and adults of all backgrounds—right now.

Hopefully, you’ll find these ideas add a new perspective and are worth considering.

Over the last twenty years, the forces of globalization and technology have wreaked havoc on the value and pay of retail, factory, and most semi- and low-skilled workers across the country. Then again, in 1900, almost 40 percent of Americans worked on farms; now it’s less than 2 percent.

We’ve been through disruption before and not only survived, but thrived. We can do it again. But this time, change is arguably coming faster than ever. And not everyone has time for more education.

Fortunately, there’s plenty we can do to help during the economy’s transition. It just may take a little different mindset. Thinking like a long-term investor, rather than an accountant at the Congressional Budget Office, could come in really handy as we try to help our workforce navigate these new disruptions.

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IN T RODUCT ION

Immigration is a controversial topic. But for the United States, it should be a giant bonus, not a problem. A simple change to our immigration rules can simultaneously help our current workforce, supercharge growth, and confront the challenge of a globalized economy. Though most Democrats and Republicans would support it, our existing immigration policies encourage the exact opposite behavior. The good news is—it doesn’t take a complicated investment thesis to understand all the benefits of this change. The math is so simple and the evidence so compelling, an elementaryschool education should do the trick. While there are no free lunches in economics nor sure things in investing, this may be an exception.

Pretty much everyone hates banks and Wall Street. (I got nothing here, just thought I’d mention that.) Actually, there are some simple changes to the way we capitalize and regulate banks that should help grow the economy, increase access, and create more jobs. And this time and with these changes, the risks and benefits will fall exactly where they should—with investors, not taxpayers.

Finally, if you think suggesting we “blow up” Social Security is like diving head first onto the third rail of politics—try me. There’s a better way for the many to save and gather wealth. Australians do it. We can too. But if we call it “supplementing” Social Security instead, we can get a lot more people onboard. Now, everyone can be a long-term investor.

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IN T RODUCT ION

What the proposals that follow have in common is a simple mission to address two basic questions: If we want to make productive investments in the well-being of our citizenry—particularly those who need it the most—what else can we try? And, how can we use the strengths of our government, the dynamism of our private sector, and the power of incentives to achieve more equality, opportunity, and growth for everyone?

Of course, Thomas Paine offended so many people during his lifetime that only six people showed up for his funeral. Luckily, I have a big family, so even if you don’t agree with everything you read, I hope you’ll at least appreciate this latest attempt at some Common Sense.

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Praise for

COMMON SENSE “Like many others, I am deeply saddened by the degree of inequality in our society. In Common Sense: The Investor’s Guide to Equality, Opportunity and Growth, Joel Greenblatt goes beyond documenting the problem to advance a handful of proposals that can contribute to a solution or at least jump-start the debate. I recommend this book to anyone who cares about these things. It’s not just for investors.”

— HOWARD MARKS, CO-CHAIRMAN, OAKTREE CAPITAL MANAGEMENT “Even Joel Greenblatt, superb investor and lucid stylist, would be shocked if you agreed with each and every one of his ideas for improving the quality of American life. But there’s not one idea in these fine and well-wrought pages that won’t make you stop and think.”

— JAMES GRANT, EDITOR OF GRANT’S INTEREST RATE OBSERVER “The only thing more appealing than common sense, humor and brevity is impact. In this thoroughly engaging tome you will find, among other things, a workable way to break the cycle of poverty (imagine our country without an underclass!) and a bipartisan immigration reform that screams to be enacted. Not bad for twenty bucks.”

— ANDREW TOBIAS, AUTHOR OF THE ONLY INVESTMENT GUIDE YOU’LL EVER NEED $19.95

Printed in the U.S.A.