on October 3, 2001
Okay, so the title of the book leaves something to be desired, but that is the ONLY part of this book that falls short. Joel Greenblatt has written an excellent book on profiting from special situations. That's fortunate for the rest of us, since so far as I can tell, this is the ONLY book that provides an overview of event-driven investing. Note that I said "overview"--it's by no means definitive, nor does it claim to be. Certainly more rigorous treatments of risk arbitrage exist. However, this is the only book I'm aware of that is dedicated to explaining merger securities, spinoffs, recapitalizations, bankruptcy and yes, risk arbitrage.
The book's format is well thought out: each chapter explains the how and why of investing in one particular corporate event, and then utilizes case studies to ram the point home. The case studies are interesting, reading at times like a novel. The tone is lighthearted and endearing throughout, and the frequent jokes, although usually kitschy, hit the mark nonetheless. (One gem: "There are three types of people in the world--those who can count, and those who can't.")
This book is not for everyone, however. Beginners should first read Peter Lynch, Ben Graham, and Phillip Fisher before tackling this one. Greenblatt assumes a reasonable degree of comfort with financial statements and value investing strategies on the part of the reader. The use of LEAPS and options in special situations is covered, but should be avoided by all save for the most advanced investors (as per the author's advice). Also, professionals working in the field of event-driven investments would probably find little they did not already know. That being said, the book reads quickly, so a pro would be little disadvantaged for reading it.
Finally, it's nice to know that the author can walk the walk as well as talk the talk. Greenblatt publishes his firm's audited returns over a ten-year period at the end of the book, and they are out of this world. We're talking an average annual return of 50% for ten years. This book is not a case of "Those who can, do; those who can't, teach." Greenblatt can, and he does.
This book is for those who cannot resist the idea of wanting to outperform the market averages. For most people, that's dumb idea . . . and indexed mutual funds would be a better choice.
But if you are willing to roll up your sleeves, put on your green eyeshade and look at things differently, Mr. Greenblatt's approach is a very valid one.
If you read only one of Mr. Greenblatt's books about investing (the other one is The Little Book That Beats the Market), read this one. You'll make more money with this one.
You can be a Stock Market Genius has the simplest explanation for special situations investing involving unusual securities that I have seen for the lay person.
For most people, this book will be a lot to chew on. I suggest that you start by simply trying to understand and apply one idea in the book . . . such as finding under priced small spin-off stocks. After you get the handle on that one, go on to another approach that interests you.
I have worked for over three decades helping companies design these new securities that fascinate Mr. Greenblatt so much. From that experience, I'm constantly amazed at how stupidly most corporate finance departments and investment banks pursue these new structures. I suspect that the answer is that the heavy brainpower is saved for more profitable work like M&A.
As a result, you will almost always find a great investment opportunity if you look at unusual securities. I encourage you to begin by spending a half hour getting the background on any unusual transaction you read about.
You can also improve on this book by doing more precise measurements of securities values (if you have the background to do that), but for many severely undervalued securities Mr. Greenblatt's approach of taking guesses about what a reasonable value is will work just fine.
Although the examples are older, these kinds of opportunities still abound in most categories he discusses (stub stocks are the exception). Mr. Greenblatt has a real talent for putting his cases together to make them easier to understand.
Have a ball!
on May 5, 2000
This is an amazingly generous roadmap to lesser-known corners of the securities market. When I first picked it up about 2 years ago, I was terribly disappointed because all the strategies Greenblatt describes require a fair amount of WORK and careful thought --and it was my impression that "Stock Market Genius" entailed effortless wizardry! But the work is contagious and engaging (like digging for buried treasure, as aptly described by Joel Greenblatt).
Despite the book's schleppy and seemingly unrealistic title, Greenblatt's descriptions are wonderfully realistic and honest. In particular, although I've looked for other resources on spinoff investment strategies, everything you really need to know is in this book. The author's style is flippant but endearing, and the reader will get more than his/her money's worth from the ideas described in this book.
on January 16, 2006
In this older book, Greenblatt reviews what diligent active investing is all about: uncovering economic value in Byzantine places where information is not analyzed so efficiently by the market. No one is going to generate excess returns trading Fortune 500 stocks in stable situations. But, as Greenblatt recommends, if you study special situations in arcane details you may have a better chance of extracting above market returns.
His advice is commendable, but it is not for the average investor. His approach assumes an astute knowledge of investment and corporate finance rarely found outside the institutional investment community. After all, how many friends do you know have made money using such a sophisticated and labor-intensive approach? I have personally tried a couple of decades ago armed with an MBA and years in corporate credit analysis and failed.
Another obstacle is that since the book was written investors have pored billions in hedge funds who chase the same types of market inefficiencies. Therefore, the market for all these special situations (risk arbitrage, restructuring, liquidations, etc...) has become more efficient.
If you are just a regular investor, sound investing boils down to evaluating one's risk tolerance, diversifying your assets accordingly, and investing them efficiently. If you want to know more about this I strongly recommend Burton Malkiels' "The Random Walk Guide to Investing."
on January 9, 2008
1999 Fireside reissue of 1st edition (1997), 299 pages (of which 261 pages form the main body of the book).
Despite the awful title, I really enjoyed `You can be a Stock Market Genius'. Greenblatt laces his (excellent) content with plenty of jokes, which I always think of as a somewhat risky approach: some readers who would otherwise appreciate the content will not like the delivery.
By the time of publication, Greenblatt's investment firm had already achieved 50% compound annual growth for 10 years, so could write his book however he pleased. I like it when people don't need to write books for financial reasons - you get a better look at the author.
Greenblatt's book reminds me strongly of Mohnish Pabrai's `The Dhandho Investor', which I read a few months ago. I don't think one should be particularly surprised, as they both belong in that tiny group of investors who have not just beaten the stock market, but have absolutely smashed it. The following summary points for `You can be a Stock Market Genius' could be used for either book:
1. Concentrate your efforts on areas where bargains are likely to occur ("If you preselect investment areas that put you ahead of the game even before you start ... the most important work is already done.")
2. Limit downside risk ("If you don't lose money, most of the remaining alternatives are good ones.")
3. Load up on only a few best ideas ("...don't screw up a perfectly good stock-market strategy by diversifying your way into mediocre returns.")
The second point, which is the same as the concept of `margin of safety,' works because it - unlike the world of analyst earnings forecasts - acknowledges the severe uncertainty that is reality. I particularly enjoyed Nassim Taleb's `The Black Swan', partly because the world he reveals ties in so well with the `value' approach to investing. Both good and bad large, unpredictable events occur more frequently than we expect. If you organise your investing (and your life) so that you are protected from some of the negative shocks, but left exposed to the positive ones, this is likely to serve you well.
Pabrai focuses on distressed situations (what he calls `high uncertainty, low risk') and Greenblatt likes special situations (spin-offs, merger securities, etc). But the theme is the same: in order to get really good results you've got to be looking in areas other people are not.
Greenblatt is willing to concentrate more than Pabrai, who simply limits his positions to a maximum 10%, to protect himself against error. But these are differences in style rather than substance. They both look for promising situations/ideas and only then do the necessary work. Both profess to avoid use of Excel spreadsheets (In 2006 Greenblatt was asked if he used spreadsheets: "I really don't know how to build spreadsheet models. But the good news is that you don't need spreadsheets to make money.") In other words, they keep it simple.
Before he gets into the specifics of special situation investing, Greenblatt spends a chapter going over `some basics'. This short section of the book is either an excellent primer or reminder of the general requirements of a successful investment strategy - and I commend it to you without reservation.
His book also contains some excellent advice about selling. It is something I have been thinking about a lot recently after reading Pabrai's `The Dhandho Investor' and Katsenelson's `Active Value Investing' - both of which make a strong case for the need to learn to sell in order to get significantly above market returns. The problem with this advice is that selling well is somewhere between extremely difficult and impossible (as various super investors, such as Greenblatt, Marty Whitman, Munger, etc. have said).
Greenblatt's advice is very simple:
"The bargain created or unmasked by the special corporate event - that's what draws me in. The quality and nature of the business - that's what usually determines how long I stay. So trade the bad ones, invest in the good ones."
(You may note that this is essentially the same as Buffett's counsel, who wrote: "when we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.")
I was struck by how often Greenblatt rammed home the importance of incentives throughout his book:
"Insider participation is one of the key areas to look for when picking and choosing between spinoffs - for me, the most important area."
His understanding of the critical importance of incentives is very wise and is surely one of the key reasons for his outstanding success (although I wonder if he still holds stock options in such high regard, now it is clearer that the lack of downside risk can encourage excessively risky behaviour?). Charlie Munger said this about incentives in `The Psychology of Human Misjudgement':
"...almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behaviour. But this is not often so. I think I've been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I've always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive super-power."
It's also one of the reasons why I like Karen Pryor's book, `Don't Shoot the Dog,' so much. Munger pointed out in the same talk I quoted him from above, that what economists call `incentives' is the same as what psychologists call `reinforcement'. Reading an excellent book on training using positive reinforcement (like Pryor's) is thus extremely useful in improving your understanding and critically, practice of making use of incentives.
So long as you're not the type who objects to a light-hearted approach, you're likely to find Greenblatt's book a lot better than the title suggests. Highly recommended.
on November 11, 2005
This book may not be that mention-all, answer-all flawless guide, but reading it was a fulfilling joy. It's chapters are well-laid out. They appeared sequential in tackling their issues; and very thorough in explaining how and why choosing a particular line of investment should be evaluated.
However, anyone who is new to corporate investment and/or stock market as a whole, would wish that the writing style of the author is a bit more elementary. The knowledge of certain basic issues were already assumed; and were not explained at all. This is understandably so, because the book was designed for experienced stock-brokers, who are now aspiring to become Wall-Street gurus. So, if you are relatively new in this game ( and do not have previous investment/brokerage experience), reading a more introductory text before going for this one is highly recommended.
On the other hand, if you are already a battle-tested pro, just take a seat. This is as good as it gets! The generous amount of case-studies (and other real-life scenarios) provided in this book will impress even the likes of 'Oracle of Omaha'. No type of situation or strategy was overlooked! Indeed, this book is a phantom of delight. Its chapters did justice to the entire field of corporate investing. And they included important issues like mergers, trade-offs, acquisitions, liquidations, expansions, risk management, bankruptcies, and many others!
But, since elements of luck are integral part of any investment strategy, I would suggest that each aspiring investor make that extra effort, which will compliment his or her hardwork with careful thoughts and projections. No possibility should be ignored! This is because in this precarious terrain, events can suddenly change: leaving even the most accomplished investor running for cover. The unfortunate events of the September 11, 2001 served as an eye-opener for me. I learnt a very big lesson.
In conclusion, the literary dynamics of this book is invaluable. The chapters did embrace a wide range of issues; and I very much appreciate every page of it.
on August 16, 2004
The following two quotes always jumped into my mind when I was reading this book:- "No pain no gain" and "Talent is spelt W-O-R-K".
Back to the book. It's a real page turner with plenty of success stories that explained the phenomenal return of the fund managed by the author, a genuine value investing practitioner, who began the book with some investment basics like do your homework and never listen to tips, then followed by intensive description of spinoffs, partial spinsoffs, rights offerings, risk arbitrage, mergers, bankruptcy, restructuring, and various derivatives.
Nothwithstanding the author's humour, this book is exceptionally insightful. I love the quick summaries for individual tools much because they are so concise and helpful. In case you are committed to do your homework (several weeks to study for just one single opportunity), and you are patient enough to invest only on around five opportunities in a year, this book is a must buy!
p.s. Below please find some summaries for your quick reference:-
1. Spinoffs, in general, beat the market.
2. Picking your spots within the spinoff universe for even better result.
3. Certain characteristics point to an exceptional opportunities:
- Insitutions dont want it and not because of investment merits
- Insiders want it
- A previously hidden investment opportunity uncovered by it
4. Locate and analyse new spinoff prospects by press and SEC filings
5. Paying attention to "parent" can pay off handsomely
6. Partial spinoffs and rights offerings create unique opportunities.
For risk arbitrage - NO!
For Merger securities (the by-products issued for M&A) - Yes!
on January 26, 2002
I was in Joel Greenblatt's class at Columbia and he assigned this book. It is by far the most useful equity investing book I've ever read. You can't argue with the success of Special Situation investing or with his track record. He gives real life examples showing his thought process and by the end of the book you realize there is no "trick." It's just keeping your eyes open to these situations and realizing that in many cases the individual investor has a distinct advantage over the institutions that have size and style constraints regarding their investing.
The ONLY reason I read this book was that it was recommended by some trusted sources - as others have noticed, the title is horrendous and highlighted when coupled with the gaudy yellow cover. In particular, the title makes me think of late night informercials promising easy rewards in real estate with no money down. Fortunately, the content of the book more than makes up for the title.
Greenblatt's methods ultimately stem from the "intrinsic value" and "margin of safety" ideas developed by Benjamen Graham (see "Security Analysis" and "the Intelligent Investor"). However, in somewhat of a nod to adherents of the efficient market theory, Greenblatt focuses his energies on areas that are subject to less scrutiny, and hence, less likely to be efficiently priced by the stock market. He notes, for example, that many institutional investors are prohibited from owning certain kinds of securities (e.g., a stock index fund can't own bonds), and that investors that receive securities in some transactions may not desire to hold them. By researching companies that are involved in "special situations," Greenblatt theorizes that investors can uncover stocks that are worth more than their current market value. To this end, the book covers opportunities with spin-offs, bankruptcies, restructurings, rights offerings, re-capitalizations, merger securities and companies going private.
Although Greenblatt is clearly an intellectual heir to Benjamin Graham, one of the great things about this book is that is provides a theory, albeit a time-consuming one, whereby investors can uncover their own opportunities. IMHO, formulaic investing is unlikely to work over the long-haul, because a sucessful formula that is too simple to replicate will tend to draw competition. Rather than relying on formulas, Greenblatt tells readers how to identify situations that MAY present opportunities. It is up to the individual investor to research those potential opportunities and determine whether they are worth pursuing.
Although Greenblatt is a solid writer and the book is highly entertaining, I believe most readers would benefit from an understanding of value investing principles before trying to read this book. It might be a good idea to read Graham's "Intelligent Investor" at the very least (although this is a much tougher read than Greenblatt's book, and Graham's approach is not entirely compatible with Greenblatt's). Moreover, Greenblatt assumes that readers have a working familiarity of financial statements.
One last point of note - some of the ideas that Greenblatt sets forth are somewhat similar to those propounded by Marty Whitman in "the Aggressive Convervative Investor" and in "Value Investing - a Balanced Approach" (Greenblatt mentions Whitman's Third Avenue Value Fund as a possible source of investment ideas in the book). Both of these are good reads, particularly along with Greenblatt's book. Another good book to read is Dreman's "Contrarian Investing."
In all, this book is a great read, and I'd highly recommend it, but I would not recommend it for beginners.
on June 12, 1997
Don't be turned off by the book's funky title. "You can be astock market genius" is actually one of the few investment classicsout there. The book does not deal with everyday investment jargons. (Low PE, high growth rate, etc.) Instead, it focuses on rare special corporate events. And how investors may profit by looking through these small cracks which the greater investment community often ignored and misunderstood. Although I doubt many individual investors will be able to fully utilize what the author suggested. (It is a difficult proccess which required substantial background in related areas.) These corporate events are often quite unique in each individual case. And some of them carry tremendous risk. (eg. bankruptcy) Yet, if use properly. These methods can dramatically magnify one's return. (For instance, the section where he discussed how investors can use Leaps in turnaround situations.) Even for those readers who do not attempt to participate in special situation investing, Mr. Greenblatt's logic and methods are very beneficial in shaping investment decisions in general.