Jason Stipp: I'm Jason Stipp with Morningstar, reporting from the Value Investing Congress in New York. I'm here with Joel Greenblatt, he's the author of "The Little Book that Beats the Market," a professor at Columbia, and also a managing partner at Gotham Capital.

He wrote a book that screens for stock that have high earnings and that also have high returns on capital and high earnings yields. Thanks so much for joining me, Joel.

Joel Greenblatt: Sure, happy to be here.

Stipp: When you wrote the book, 2006, I believe was the publication.

Greenblatt: It came out in 2005, yes.

Stipp: OK, 2005. It was before the down market that we've seen. So what kind of performance did you see from your screens in the down market, and maybe what did you learn from how those screens were working when the market took such a downturn last year?

Greenblatt: The book actually went through about five years ago, so the updated results from the book show that over the last five years, the formula was up approximately 75% during a period where the market was up about 5%. So it continued to work.

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Over the last three years, it's been up about 16% combined, when the market was down 15%. And last year when the market was down about 7% through Sept. 30, the formula was up about 14%. So it's worked pretty well during that period.

Nevertheless, in 2008, if you invested in the "magic formula," you would have lost almost as much as the market lost. This year it's doing significantly better. It's up around 46% through Sept. 30, versus about 19% for the market.

There are periods where the formula does well, and there are periods where the formula doesn't do as well. Over long period of time, it seems to have done very, very well.

Stipp: So part of its success, I would imagine, is being able to ride through those rough patches and understand that you're investing for the long term and not getting discouraged by some of that short term, perhaps, underperformance that would happen with this kind of a methodology.

Greenblatt: I think that's exactly right. I think the great thing about it is it's not so great, meaning it doesn't always work. If it worked every month and every year, everyone would do it and those excellent results would get arbitraged away.

But if there are periods of months or even a few years where the formula doesn't work, people get discouraged and don't follow it. That enables most people just to drop out and not follow it. That's why I'm not worried, after writing a book and speaking at a conference or whatever it is, that so many people will be doing it that these bargains will be bid away.

I think value investing has worked for a long, long time, and I think there are a lot of emotional and psychological reasons why it will continue to work over a long period of time.

Stipp: Speaking of value investing, obviously the huge downturn we saw created a lot of opportunities in the dark days of the market about a year ago. But now it seems that we've had a rally, where a lot of people have said it's a junk rally or lower-quality stocks have rallied harder than some of the higher-quality stocks.

How would you assess the opportunities available today from the framework of your screen versus what you were seeing about a year ago?

Greenblatt: It's a good question, but it's a hard one to answer. We started this firm Formula Investing really to be able to follow this formula. And we did a study for it that went back 10 years that showed the S&P has been down 2% over the last 10 years through Sept. 30.

Yet if you'd followed the formula, you would have been up over 290%, or almost quadrupling your money over that time. So if I knew 10 years ago that the market wasn't going up over the next 10 years, I probably wouldn't have invested, and I would have missed out on all these opportunities.

So I really don't try to do that. I'm really just trying to buy the cheapest and best companies based on the formula, and think that over time that makes sense and will work out. It's a great question you have; I don't have the answer to it.

Stipp: Another question is, the formula does seem quite simple. It's obviously out there in a book that you wrote. With a lot of qualitative strategies that screen stocks, it seems like their competitive advantage can be sort of worn away by others coming in and using that same strategy. What do you think will help your screen to hold up over time, given that possibility?

Greenblatt: A lot of quantitative managers, they really need a smooth return. So they're usually going long/short. They have a long portfolio or a short portfolio and they try to smooth the returns over time.

But what you have to do is use some shorter-term trading factors and balance portfolios in different ways to really keep the volatility quite low. And you're really compromising on what's cheapest and best.

What's good about the magic formula that we're using at Formula Investing really is that you're not really looking at that. It is bumpy. Value investing is a bumpy ride. That's sort of the curse of value investing, but that's also the benefit. It's hard to follow, because there are periods of underperformance. But if you're a long-term investor, there are few better ways to invest.

Stipp: So it's that long-term perspective that can give you that edge over time, which a lot of the professional money managers don't have the benefit of being able to follow.

Greenblatt: I think you said it perfectly. Professional money managers can't really afford to underperform for a period of time. They almost can't do something like this, be pure value investors. I think that's huge advantage, and that's why it keeps working. You can go back 50 years or 60 years or 30 years or 20 years or over the last 10 years, and this stuff works.

It's a bumpy ride, but it works. If you're truly a long-term investor--which if you're investing in the market, that's what you're supposed to be--then this is a great strategy. I have full confidence that no matter how many books I write, it will continue to work.

Stipp: Joel Greenblatt, author of "The Little Book that Beats the Market," thanks so much for joining us today.

Greenblatt: Thanks so much.