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Joel Greenblatt

Chris Goodney/Bloomberg

There may be froth in the market, says Gotham Asset Management’s Joel Greenblatt—but it isn’t in high-flying tech names like Google-parent Alphabet, Amazon.com, or Microsoft. The hedge-fund manager and author of The Little Book That Beats The Market shared his views on investing—and insights from Common Sense, his recently published book about solutions to problems such as education inequality—with Barron’s readers during a Barron’s Live call on Tuesday.

If an investor bought shares of the 261 companies with a market capitalization of more than $1 billion that lost money last year, they would be up 75% year-to-date through September, Greenblatt said. “That’s where I think the froth is,” he added.

While investors may be on the hunt for the next Google, Microsoft, Facebook, or Amazon, it is unlikely that most money-losing companies performing well this year will mirror them, he said. “Some of the biggest companies aren’t where I think the froth is,” Greenblatt said. “It’s in the smaller companies trading at those extraordinary prices.”

Greenblatt said he doesn’t pick stocks based solely on their growth or value characteristics, citing Warren Buffett’s observation that growth and value are joined at the hip. Rather, he looks at a company’s cash flow. “It really comes down to analyzing cash flows for businesses,” Greenblatt says. “They grow over time, and you want businesses with good franchises.”

In fixed income, Greenblatt said he would stay away from long bonds, given today’s low rates. “The risk-reward is terrible,” he said. “I might put money into items that are closer to cash and maybe look for other opportunities…I would not be a buyer of long-term bonds here, even for diversification purposes.”

Greenblatt explained that he always has a risk-free rate in mind when he buys a stock. “My assumption is, [today’s rates] are abnormally low rates, so I try to normalize the risk-free rate over time,” he said.

Greenblatt also discussed his latest book, subtitled The Investor’s Guide to Equality, Opportunity and Growth. In the book, he advocates for an alternative certification to a college degree, which could create a pathway to well-paying jobs for people unable, for various reasons, to attend college and attain a degree. “This is something that major companies—we’re talking about Google, Microsoft, Amazon, J.P. Morgan —could do right now,” he said.

To broaden the pool of potential applicants for high-paying jobs, companies could state what kinds of alternative courses, tests, or certificates they would accept in place of a college degree. “All they would have to do is make public a list of which tests, which courses, which certificates would be considered for these specific well-paying jobs,” Greenblatt said.

“Once there’s a buyer [for certificate earners], capitalism takes over and an ecosystem of tutoring services and online resources will develop to help people pass this test,” Greenblatt said.