You Can Be A Stock Market Genius; Summary & Commentary

Summary & Commentary

You Can Be A Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
By Joel Greenblatt

To talk about books on equities investing there are plenty of both immensely valuable classics and downright trash out on the shelf; but when you are busy with everyday works and studies, you may find it difficult to decide which book will truly be worth your time before you commit that precious dozens of hours or more into uncovering whatever knowledge there is inside the contents.

Once in a while, you may want to take a look beyond typical directional strategies and read a book like this one.

This book focuses solely on event-driven investing strategies (or so-called special situation investing); with a scope that covers company spin-offs, bankruptcies, restructurings and recapitalizations. In addition to the explanation of the above situations, the book also provides insights on recognizing opportunities from these situations as well as rational ways to profit from them.

If you consider your time the most precious commodity and absolutely don’t want to sit down and read, this summary and commentary should provide you with a starting point, from which you can look directly into specific strategies that interest you or most suit you.

I would recommend the book’s strategies to somewhat experienced investors as you should have an in-depth understanding of equity securities and derivatives, in order to be able to fully utilize the techniques explained in the book, or to a lesser extent, at least be comfortable with getting USEFUL information out of company SEC filings and other available resources.

If you are rather new to investing, I suggest staying away from these methods until you have some experience on managing your own portfolio and a thorough understanding of your psychological profile; these aspects dictate how you will behave and perform overall as an investor. Without them you are vulnerable to all kinds of biases which will quickly put you out of the game.

That being said, it won’t hurt (hopefully) to just read through this summary of the book.

“Trade the bad ones; invest the good ones.”

Author Bio:
Joel Greenblatt, holder of a B.S. and M.B.A. from Wharton School, is the founder of Gotham Capital, a hedge fund that earned an annualized return of 50%+ over a ten year span. He is also the author of The Little Book That Beats The Market.

For those who have read The Big Short by Michael Lewis, you might recognize Gotham Capital as it was a partner in a hedge fund called Scion Capital. Michael Burry, the founder of Scion Capital, spotted out the absurdity of the exploding U.S. sub-prime mortgage market early on, and later became one of the few who successfully profited from the sub-prime mortgage crisis. For more go read The Big Short.

Contents Breakdown:
- Introduction;
talked about some common hindrances that average investors or even professionals often encounter throughout the investment time-horizon, and touches briefly on the effect of diversification through the use of Capital Asset Pricing Model (CAPM; systematic vs non-systematic risks). Lots of information about behavioural finance, risk-management and CAPM are available online so I will not go into detail.

• Spin-offs;
  In general spin-offs beat the market, and it’s even more profitable if an investor is able to recognize better opportunities within a spin-off universe. This section explained some typical motives of companies that decide to transform a part of its business into a spin-off, such as to consolidate debt, avoid tax payments, or separate an unrelated business etc.

It also pointed out, from the investor’s perspective the importance of careful research, which is usually through reading the parent company and the spin-off’s financial reports and general information (mostly SEC filings such as 10-k, 10-q, proxy statements) and examining major activities that the companies undergo (press release, statements of beneficial ownership, any other reliable sources), to discover opportunities that will lead to potentially substantial up- or down-turns.

Highlights:
* Some shareholders are not interested in the shares of the spin-off at all so they usually get rid of the shares right away. This can create a great opportunity for you to acquire the shares at a huge bargain price
* Pay attention to insider activities; if the company’s executives are holding on to or even purchasing more shares of either the parent company or the spin-off, you know something will/ is going on
* Sometimes hidden opportunities may be created or revealed (eg. The spin-off is the parent company’s attempt to tap into a niche market, which has a great potential for which to develop into a market leader or even monopoly), in such cases, they should become the top priority on your research

• Risk Arbitrage and Merger Securities;
  Although risk arbitrage is recognized in the book as a type of special situation investing that’s potentially profitable, it is actually not recommended by the author mainly due to its highly competitive nature, which makes it very difficult for average investors to beat the professionals to the play. However opportunities can still be found through purchasing merger securities.

Highlights:
* Sometimes companies may utilize merger securities to pay for the acquisition. This usually presents opportunities that should be viewed favorably mainly because these securities tend to be undervalued (most investors don’t want them in the first place). The discriminate selling of these securities often effectively drive down the price, regardless of the true underlying quality. Therefore, with careful research, you can seek out much overlooked opportunities that can lead to substantial returns
* Be very careful with anything that has merger or acquisition activities involved, and timing is very important because it is always possible for a deal to go bad or get stretched into a negotiation marathon that lasts a long time

• Bankruptcy;
  It is rarely a good idea to go long on the stocks of a company that’s filed bankruptcy as you, being an investor, usually do not receive anything until the company’s stakeholders and creditors are paid off. Indeed, unwarranted speculations in the market can sometimes bring the share prices to extreme highs, but as a conscious investor you should probably stay far away from it.

Highlights:
* When investing in these situations, pay close attention to company management’s projections for future operations and keep track of public filings; most of the time you will be able to either confirm your decision of staying away, or recognize profitable opportunities during the company’s emergence from bankruptcy
* The company’s debt could be something you might want to purchase; similar to merger securities, most investors don’t want them so you can seek for securities that trade at a discount due to undervaluation
* Even if a company emerges from bankruptcy it does not mean the company will make a case of coming back and stronger than ever. Usually it is still what it is, and you should be aware of why it filed for bankruptcy in the first place

• Restructuring;
  Corporate restructuring might not always happen under the best circumstances, but you can certainly find great opportunities within. For example when a company announces a major restructuring, its underlying motives can be to get rid of the divisions that hinder the growth of the profitable ones; in such case, it creates an entirely new room for its earnings prospects to grow. To profit from restructuring events, you can either try to recognize potential restructuring candidates, or directly invest in companies that are rid of their sores.

• Recapitalization and Stub Stocks;
  Too boring. I’m not going to talk about this so do your own research.

**LEAPS, Warrants, Options
For those who have had some experience in trading, regardless of your style and strategy, you are probably aware of both the beauty of derivatives and their potentially devastating damages to your portfolio if you don’t play them well. As always, you can either protect your positions or magnify your gains/ losses and these strategies can be incorporated into any one of the situations mentioned above, but do so at your own risk.

I’m quite sure most people who have kept reading until this point do have some experience in trading so I won’t go into much depth about your information sources.

That being said, this is a site that I love to use to get myself started on spin-off researches:
http://www.stockspinoffs.com/upcoming-spinoffs/
Of the entire list I would like to point out three of them:
Kraft-Mondelez spin-off,
United Online-FTD spin-off, and
McGraw-Hill Companies-McGraw-Hill Education spin-off (my faith is with this one)

This one keeps track of the “investment guru’s” transactions, including the books author Joel Greenblatt:
http://www.gurufocus.com/ListGuru.php

I will try to come up with more of the similar summary & commentaries later; if you find this useful/ think it sucks ass feel free to comment here! Happy trading!