Thinking About Money

The question mark is my addition to the title of Joel Greenblatt’s book “You Can Be A Stock Market Genius – Uncover the Secret Hiding Places of Stock Market Profits.” I chose this one based on strong Amazon rankings, and I must confess, it was not at all what I expected.

As you know if you’ve been following this blog, one of my immediate goals is to learn more about investing. Up until now, I’ve been I suspect a fairly average investor – probably too much cash, a selection of index funds and specific or sector mutual funds, and a handful of individual stocks.

Where it comes to individual stocks, my record may be somewhat unusual. I have a pretty good record of choosing stocks to invest in. I have a terrible record in terms of knowing when to sell. Specifically, I have an all too common habit of hanging on to declining stocks way too long.

That said, I was expecting this to be a general purpose “how to invest in stocks” book. It is nothing of the kind.

Greenblatt’s focus is on identifying what he calls “special circumstances” with regards to stocks. His main focus is on spin-offs, where a company essentially splits into two (or more) parts. But he also focuses on mergers, recapitalization, rights offerings and bankruptcies.

What I especially appreciated in this book is what I perceived to be relative honesty both in terms of the advantages and disadvantages of each approach, and a realistic evaluation of what an individual investor needs to do to identify these opportunities. Specifically, he is quick to point out that some techniques (such as investing in bankrupt companies or those newly emerging from bankruptcy) are much higher risk than others such as investing in spin-offs. He also makes it clear that since many of these types of investments are, by definition, contrarian, you really do have to do your homework – and be willing to look at many opportunities before choosing one to invest in.

This is not a book for the beginning investor. I would not recommend it to someone just starting out investing in stocks. However, for those like me, who are trying to take their investment skills to the next level, it is a worthy read.

The book is long on illustrative examples and short on actually showing you how to evaluate companies. However, the author does make it clear that it is essential that you learn to interpret financial statements and be willing to do your own research if you want to have any realistic hope of taking advantage of the kinds of opportunities he describes.

Though slightly dated (1999), I don’t believe the fundamental concepts of the book are less valid (though the phenomenal results he claims should be discounted for having occurred during one of the greatest market booms in history). The biggest change is that while the book mentions the Internet, it understates the amount of information now available on the net.

One of the key concepts of the book is that it is possible for an individual to identify opportunities because, by their very nature, they are not of great interest to mutual fund managers. For example: In the case of a spin-off, the results of the transaction might be that a fund now owns shares in a smaller company that does not fit into the funds target industry or company size. Fund managers might as a result quickly unload the stock rather than evaluating it fully.

On the flip side, one change not necessarily reflected in this book is the dramatic growth in hedge funds that might already be taking full advantage of the kinds of opportunities described in this book. If that is the case, it still may be possible for individuals to take advantage of them, though they may not be as rich as they were seven years ago.

As for myself, the book definitely opened my eyes to a way of looking at certain kinds of events that I was not aware of, and gave me the confidence, or at least the hope, that I can learn to understand them well enough to understand whether a good investment opportunity actually exists.

I do plan to try some of the techniques described in the book – but not yet. For all that I’ve been reading (and preparing) financial statements for years, I think I need to learn a bit more in that area and try those skills out on an evaluation of my existing portfolio. But I will be returning to this topic, hopefully in the not too distant future.

Meanwhile, for intermediate or skilled investors, I recommend “You Can Be A Stock Market Genius – Uncover the Secret Hiding Places of Stock Market Profits” by Joel Greenblatt as a very worthwhile read.

This entry was posted on Thursday, June 8th, 2006 at 8:35 pm and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.