You Can Be a Stock Market Genius – Joel Greenblatt
My only problem with this book has been its title. Not only is it tacky but it also gives a wrong sense to people. Apart from the title, it’s a very informative and useful guide to discover various methods to invest in Stock market. Before I dwell further upon this book, let me remind all those who follow Benjamin Graham – The father of Value Investing and an author of security analysis, he uses a term called “Special Situations”. The book is all about these situations.
The author of this book, Joel Greenblatt is the founder of Gotham Capital, a private investment partnership firm achieving 50% annual returns over a period of 10 years. Thus Greenblatt definitely practices what he preaches.
Joel Greenblatt has explained in a simplified manner, the nuances of Special Situations such as Spin offs, Restructurings, Merger Securities, Rights Offerings, Recapitalization, Bankruptcies, Risk Arbitrage. Each one of these provides ample opportunities to invest and generate profitable returns in them.
Some of these situations cannot be exploited by a Lay investor but some situations like Spin offs, Right offerings can definitely provide ample returns to the investor doing thorough analysis.
Spin-offs: Spin-offs are often but not always the result of a parent company wanting it to get rid of a subsidiary in order to focus on their core business. Since getting rid of the segment that is dragging performance helps in improving the valuation of Core Segments, the neglected spin off thus usually has a vast potential. All that is required for the investor is to find out more about the role of management post spinoff. If their compensation is based primarily on performance, they will tend to perform well. Of course, there are a million caveats but, if you do your homework properly, specializing in corporate spin-offs can dramatically improve your odds of earning high, sustainable returns in the stock market. The best part about these situations according to the author is that all the decisions to be taken about Company is on the basis of publicly available information. The author repeatedly warns to do homework!
Risk Arbitrage and Merger Securities: Joel offers a strict warning about the dangers of risk arbitrage by the small or retail investors, but risk arbitrage’s close cousin, the merger security, can offer outstanding profits to those careful investors.
Corporate Restructurings: A corporate restructuring means something went wrong! Either the company wasn’t performing up to the expectations or an outright bankruptcy might have occurred. Typically with these kinds of situations, one would stay clear of investing in a particular company. Upon thorough analysis one can think of investing if the risk is ascertained and the company is in process of a turnaround.
A simple example given by the author here is say a company has Equity of $5 and debt of $25. Its total worth is $30. Now a 10% increase in its assets will double the Equity component and thus the stock price. Caveat: A reversal of above circumstance may wipe your entire capital. Thus these circumstances must be thoroughly analyzed before investing money into it.
Stub Stocks, Warrants, Options, and LEAPs: Derivatives can make good investments, but leverage is something I personally don’t advocate. This is for people who know the nuances of trading in derivatives. Small investors like you and I can have a clear view on investments.
The Book I believe is worth reading because it provides one with a ground work on how to exploit these “Special situations” and gain profit from them. To sum up it is a well written book.
P.S: Joel Greenblatt if you are reading this, Please avoid giving tacky titles to your future endeavors.
MMS – A
Batch 2011 – 13