Monday, 11 September 2017

Book Review: 5 takeaways from Joel Greenblatt's You Can Be A Stock Market Genius

About the Author:

Joel Greenblatt is the founder of Gotham Capital, an investment partnership that achieved 50% annualized returns from founding in 1985 till close in 1995. $1 invested with Mr Greenblatt during the partnership would have snowballed into $51.97 in less than 10 years!

About the book:

You Can Be A Stock Market Genius is the 2nd Joel Greenblatt's book that I have read. Compared to "The Little Book that still Beats the Market", this book is likely written for more advanced investors. 

The book specifically discusses the merits of investing in special situations ranging from spin-offs to restructurings. While the examples cited are mostly from the United States, the know how that Greenblatt shares can easily be implemented in any markets.

Here are 5 takeaways:

1) Don't over-diversify (amongst stocks)

While Mr Greenblatt is a fan of portfolio diversification amongst alternative investments, he cautions against over-diversifying amongst stocks. This is because the incremental reduction in market risk decreases with every stock added to one's portfolio.

Mr Greenblatt opines that the penalty for a highly selective and focused portfolio (hence one with quality investments!) - a slight increase in potential annual volatility - should be far outweighed by increased long term returns.

2) Spinoffs can be tremendously profitable

The concept that spinoffs are great is not new - Peter Lynch had mentioned the same in his book, One Up on Wall Street.

However, Joel Greenblatt goes into much greater detail on why and which spinoff characteristics investors should be taking note off. In summary, situations leading to indiscriminate selling as well as insiders' interest alignment are both key towards successful spinoffs investing.

3) Risk arbitrage is not encouraged for retail investors

Risk arbitrage is the business of buying stock in a company that is subject to an announced merger or takeover after the merger/takeover announcement had been made (to earn the spread between share price and offer price). Investors are essentially taking on 2 risks:

A) the deal might not go through &
B) the timing risk related to the time value of money

Mr Greenblatt suggests for retail investors to avoid this field as the margins are small, and retail investors often lack both the time to follow each deal closely and the expertise to correctly evaluate possible reasons for failure. Additionally, he shares experience on how each deal can fail for completely unexpected reasons.

4) Merger securities are encouraged for retail investors

Merger securities are securities used to pay for an acquisition. Greenblatt shares that this could be an extremely profitable scenario especially if there is a lack of interest in these securities - as long as retail investors bother to read the fine print of the deal!

Note: There could be a lot of interest in the merger deal. The key here is lack of interest in the securities offered, which will lead to indiscriminate selling.

5) Trade the bad ones, invest in the good ones

Mr Greenblatt also shares the above selling tip in this book. Basically, while bargains might be created by special corporate events, investors should look to sell businesses without significant long term prospects as soon as value has been realized.

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material

No comments:

Post a Comment