You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits

by Joel Greenblatt

Fund manager Joel Greenblatt has been beating the Dow (with returns of 50 percent a year) for more than a decade. And now, in this highly accessible guide, he's going to show you how to do it, too. You're about to discover investment opportunities that portfolio managers, business-school professors, and top investment experts regularly miss -- uncharted areas where the individual investor has a huge advantage over the Wall Street wizards. Here is your personal treasure map to special situations in which big profits are possible, including:

* Spin-offs * Restructurings * Merger Securities

* Mergers * Rights Offerings * Recapitalizations

* Bankruptcies * Risk Arbitrage

This is a practical and easy-to-use investment reference, filled with case studies, important background information, and all the tools you'll need. All it takes is a little extra time and effort -- and you can be a stock market genius.

Genres: Finance, Business, Nonfiction, Economics, Money, Personal Finance, Self Help

240 pages, Kindle Edition

First published March 1, 1997

About the author

Joel Greenblatt is an American hedge fund manager and founder of Gotham Capital. He is also an academic and a writer. He is also an adjunct professor at the Columbia University Graduate School of Business. He is the former chairman of the board of Alliant Techsystems and founder of the New York Securities Auction Corporation.

Reviews

[Jeremy K · Rating 4 out of 5]

I read this book because, according to "The Big Short" by Michael Lewis, some of the clever people who foresaw and profited from the financial collapse used this book as a how-to reference guide to investing. I just finished reading it, and haven't tried any of the techniques, but they all seem to make sense.

Starting from a Benjamin Graham/Warren Buffet value-investing view that recommends investing in stocks that are undervalued by the market, author Joel Greenblatt recommends certain situations where an undervaluation is most likely to be found - spinoffs, any financial instrument other than common stock that is given as consideration in a merger, post-bankruptcy common stock of good companies, restructurings, recapitalizations, and call options. Greenblatt, towards the end of the book, lists other books that give good investment advice, books that teach you how to read a financial statement, and which publications to review for financial news and investment ideas.

All in all, a good read. Now I'm going to see if any of the advice works.

[Russ · Rating 2 out of 5]

Unfortunately dated. It probably gave some great "secret" advice when first released but now hedge funds and mutual funds have been designed around his ideas. He describes opportunities mostly in special opportunities including:
1) spinoffs, 2) arbitrage, 3) bankruptcy and restructuring, 4) recapitalizations.

Maybe once this stock market cycle has run its course, the book will be relevant again.

[Pushkar · Rating 4 out of 5]

So glad that I am a stock market genius now. :D

I started reading it because it was mentioned a couple of times in 'The Big Short' by Michael Lewis and most of the people who emerged winners in the 2008 downturn had vowed by this book.
The book highlights the special situations where value waiting to be unraveled. The author does a great job of describing all the situations in great detail. Though this is supposed to be a beginner's book, it would make a wonderful read for anybody who is interested in markets.

The best part of this book are the case studies that illustrate everything that the author has to say. Also, where the author suggests working on the financials yourselves and says, 'You must be paid for your hard work and not only for the risk that you take.' The humour sprinkled around in the book is quite enjoyable (esp. the bit about Pythagoras theorem).

Sadly, one doubts whether in the Indian context, the filings/proforma statements make as much sense, are as reliable and reveal as many details as they do in US. Still, I'd be on the hunt for some of the special situations mentioned here.

[Iliya Polihronov · Rating 5 out of 5]

I love Joel's writings. They're simple, well explained, funny, relevant, and very well thought out. This book is a bible for dealing with special situations. I have not seen anything that comes even close to making so much sense and offering this amount of opportunity for vicarious learning in the area.

[Vijay Chengappa · Rating 5 out of 5]

Warning: Investing as a layperson on the basis of the situations mentioned in the book can be highly risky to your capital. These one-off events are heavily contextual, industry specific and even people in the domain get the investing calls wrong most times.
Read it to understand various corporate machinations. Leave the investing to low cost index funds.

[Said · Rating 1 out of 5]

کتاب چیزی برای خواننده ی ایرانی نداره و فقط کیس های خاص وال استریت رو بیان کرده

کتاب هایی که گرین بلات معرفی کرده برای آشنایی با سرمایه گذاری رو در زیر میارم

David Dremen, Contrarian Investment Strategies: The Next Generation (New York: Simon & Schuster, 1988).
Benjamin Graham, The Intelligent Investor: A Book of Practical Counsel (New York: HarperCollins, 1986).
Robert Hagstrom, The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor (New York: Wiley, 1994).
Robert Haugen, The New Finance: The Case Against Effective Markets (New York: Prentice Hall, 1995).
Seth A. Klarman, Margin of Safety (New York: Harper Business, 1991).
Peter Lynch and John Rothchild, One Up on Wall Street (New York: Simon & Schuster, 1993) and Beating the Street (New York: Simon & Schuster, 1994).
Andrew Tobias, The Only Investment Guide You'll Ever Need (revised and updated edition) (New York: Harcourt Brace, 1996).
John Train, The Money Masters (New York: HarperCollins, 1994).

یه چند کتاب هم برای خوندن صورت های مالی گفته

How to Read a Financial Report by John A. Tracy;
How to Use Financial Statements by James Bandler
How to Read Financial Statements by Donald Weiss
Interpretation of Financial Statements by Benjamin Graham

[Yousif Al Zeera · Rating 4 out of 5]

The book provides extensive and interesting examples of opportunities that can be exploited in spinoffs, takeovers, mergers, corporate restructurings, right offerings, and, to your disbelief, bankruptcies. In other words, "special situations".


The book may be suitable more to those with finance and/or investment backgrounds but some experience in the stock market may be enough. The author has other books that are easier for the nonspecialists.

Published in 1997 so the examples will not be too recent but mostly still relevant and applicable.

[Clement Ting · Rating 5 out of 5]

The ideas are simple to understand. No rocket science here. Almost as though Joel was trying to teach primary school kids on how to earn some extra cash through stocks. However, do not take his words as a biblical practice. The book was written more than a decade back so you will still need to do your own homework if you really want to outperform the market.

[Ardon · Rating 5 out of 5]

A excellent exploration of some unique investment opportunities, and some ways to help you determine how far off the market’s pricing of a stock is.

I really enjoyed the writing style, it made reading about some relatively complex topics painless and even fun.

It’s certainly made me more keen to develop a greater understanding of how markets work.

[Tomiye · Rating 4 out of 5]

let’s get this bread

[Philip Scuderi · Rating 4 out of 5]

This is the best book I've been able to find on event-driven investing. Greenblatt addresses mergers, spinoffs, recapitalizations, etc. What's more, he explains to the reader why these situations create so much opportunity. For example, spinoffs can divest a company's interest in a relatively small business or a business that is unrelated to their main business. Shareholders often unload the shares because they don't understand the smaller business or, for mutual funds, are forced sell due to the limits of their prospectus (limited region, market cap, etc.)

[Harshil · Rating 4 out of 5]

Greenblatt says that to earn from the stock market, you need to explore the unexplored territories. That means you have to look at the places where institutional investors can't invest or are not interested. Then, he goes deeper into special situations investing in case of spinoff, merger, capital restructuring, options, warrants, and other cases.

Some of the book's content is a bit outdated (written in 1995) and for India, it is quite unrelated. But broadly, it gives you an idea how you can uncover such opportunities.

[Charlie Mcdonald · Rating 4 out of 5]

Agree with Tim Ferriss - this is a stupid book title but the book itself is very good.

It lays out how to find opportunities where nobody else is looking by taking advantage of your own research and seller psychology in a very straight forward and easy to digest way.

I honestly would never to think of investing in any of the areas Greenblatt suggest before this, but now I have a new lens to evaluate profitable opportunities.

[Rachel · Rating 2 out of 5]

I guess I am not destined to be a stock market genius - I just did not find this book interesting nor memorable. I don't know if his tips or tricks are applicable since I just could not get into reading this book. I think this is probably more of a failure on this reader's part than the book's fault.

[Penny Luo · Rating 5 out of 5]

Greenblatt introduces readers to the world of investing in special situations. He usually introduces the theories, give several case studies and then provides a summary. Very easy to read, great sense of humor. Highly recommend for those new in investments.

[Ksenia · Rating 5 out of 5]

Have you read "The Big Short"? I got the reference for this book from it, yet never got a chance to sit down and actually read it. My main concern about the book was that it was published to long ago, before the crisis, before the modern stock exchange rules and terminologies. Still, I decided to give it a try.
It was absolutely worth it. The book is not selling you some mambo-jumbo crap on how to get rich in a minute, it provides you with the way of thinking. An easy read (if you are familiar with basic financial concepts) with a lot of humor and real life stories. This book literally made me laugh on numerous occasions and that made the reading even simpler and that much more enjoyable.
Highly recommended.

Grain of salt - I never played "The Game" so can't verify how effective it is.

[Thomas · Rating 5 out of 5]

Perfect book for beginning enterprising investors. Same goes for advanced investors wishing to find several motivated seller situations. Very well written: concise, full of wisdom and explaining/summarising motivated seller situations and why. Joel followed Einstein's advice 'Everything should be made as simple as possible, but no simpler'. Very powerful book!

[Davy Hsu · Rating 5 out of 5]

Practically a gateway drug(book) to special situation investing. Witty writing style with real life (albeit old) cases make it so much more enjoyable. Even though I wish there were more details on the research process, I fully understand the author's intention to merely spark interest. The resources page is definitely worth bookmarking.

[Alejandro Botero · Rating 4 out of 5]

Although public market special situation investing is no longer as viable, Greenblatt excels in explaining the strategies theoretically and in providing real world examples. The biggest takeaway from this book is how truly great investment theses should usually (not always) be easily explainable.

[Chiso · Rating 5 out of 5]

There a a few books, you'd wish you read earlier. This is one of those.

[Juan Llamazares · Rating 5 out of 5]

El mejor incentivo al terrorismo financiero. Que pedazo de libro

[Anthony · Rating 3 out of 5]

Pretty good book. Some of it seemed over technical and wasn’t really for me, I think for some people it could be a really good read. All in all I still liked it and it had value in it.

[Saravanan · Rating 4 out of 5]

Overview:
This is one of those stock market related books where one could get some intricate & interesting profitability ideas although they may or may not work in the current market dynamics.
I liked several topics discussed in this book and these topics interested me: spin-offs, partial spin-offs, spin-offs through rights issue, mergers, stay away from risk arbitrage, recapitalisations are profitable to organisations, pricing a a call option nicely explaining with difference in current price & strike price and the cost of borrowing money for the right to buy the stock and to protect its downside market price and how he explained about stub stocks vs call option, Warrants are call options but issued by companies and mot the market and with longer expiration in years, holding call options during spin-off, cash flow is better than net income and finally time is not money but its the inverse, money is time, earn as much time for yourself as possible was a good one.

My Notes & excerpts from the book:
“If you spend your energies looking for and analyzing situations not closely followed by other informed investors, your chance of finding bargains greatly increases. The trick is locating those opportunities. It’s like the old story about the plumber who comes to your house, bangs on the pipes once, and says, “That’ll be a hundred dollars.” “A hundred dollars!” you say. “All you did was bang on the pipes once!” “Oh no,” the plumber responds. “Banging on the pipes is only five dollars. Knowing where to bang—that’s ninety-five dollars.” In the stock market, knowing where to “bang” is the secret to your fortune. With that in mind, let’s uncover some of the secret hiding places of stock-market profits.”
Usual plumber convo

“One way to take on this challenge is to think, once again, in terms of the in-laws. As you recall, if they find a painting selling for $5,000 when a comparable painting by the same artist has recently sold at auction for $10,000, they buy it. The perceived cushion of $5,000 between auction value and purchase price is what Benjamin Graham, the acknowledged father of security analysis, referred to as their “margin of safety.” If the in-laws’ perceptions are correct, their margin is so large that it is extremely unlikely they will lose money on their new purchase. On the other hand, if their perceptions are somewhat off—the quality of their painting is not quite up to the standard of the one recently auctioned, the $10,000 price was a one-time aberration, or the art market collapses between the time of purchase and the time they get to the auction house—their losses should be minimized by this initial built-in cushion, their margin of safety. So one way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety. The upside, while still difficult to quantify, will usually take care of itself. In other words, look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones. While this basic concept is simple enough, it would be very difficult to devise a complicated mathematical formula to illustrate the point.””
Limiting the downside risks

“Ironically, the very areas that are uneconomic for large firms to explore are precisely the ones that hold the most potential profit for you.”

“For about $1,000, an insurance company will agree to pay a healthy thirty-five-year-old male $1,000,000 should he be unfortunate enough to die over the next year. The actuarial tables say this is a good bet for the insurance company. But would you take the insurance company’s side of the bet? Probably not. The reason is that regardless of what the statistics may indicate, you can’t afford to lose $1,000,000—especially for a crummy thousand bucks. The insurance company, on the other hand, by pooling thousands of policyholders together can create a portfolio of underwritten risks that do follow the statistical tables. That’s why they can make a good business out of consistently booking bets that you, as an individual, can’t afford to take.”
About insurance business

“It’s an area of discarded corporate refuse usually referred to as “spinoffs.” Spinoffs can take many forms but the end result is usually the same: A corporation takes a subsidiary, division, or part of its business and separates it from the parent company by creating a new, independent, freestanding company. In most cases, shares of the new “spinoff” company are distributed or sold to the parent company’s existing shareholders. There are plenty of reasons why a company might choose to unload or otherwise separate itself from the fortunes of the business to be spun off. There is really only one reason to pay attention when they do: you can make a pile of money investing in spinoffs. The facts are overwhelming. Stocks of spinoff companies, and even shares of the parent companies that do the spinning off, significantly and consistently outperform the market averages.”
About spin-offs

“It is interesting to note, however, that regardless of the initial motivation behind a spinoff transaction, newly spun-off companies tend to handily outperform the market. Why should this be? Why should it continue?
Luckily for you, the answer is that these extra spinoff profits are practically built into the system. The spinoff process itself is a fundamentally inefficient method of distributing stock to the wrong people. Generally, the new spinoff stock isn’t sold, it’s given to shareholders who, for the most part, were investing in the parent company’s business. Therefore, once the spinoff’s shares are distributed to the parent company’s shareholders, they are typically sold immediately without regard to price or fundamental value.
The initial excess supply has a predictable effect on the spinoff stock’s price: it is usually depressed. Supposedly shrewd institutional investors also join in the selling. Most of the time spinoff companies are much smaller than the parent company. A spinoff may be only 10 or 20 percent the size of the parent. Even if a pension or mutual fund took the time to analyze the spinoff’s business, often the size of these companies is too small for an institutional portfolio, which only contains companies with much larger market capitalizations.
Many funds can only own shares of companies that are included in the Standard & Poor’s 500 index, an index that includes only the country’s largest companies. If an S&P 500 company spins off a division, you can be pretty sure that right out of the box that division will be the subject of a huge amount of indiscriminate selling. Does this practice seem foolish? Yes. Understandable? Sort of. Is it an opportunity for you to pick up some low-priced shares? Definitely.”
Reason for spin-offs selling and institutional impacts

“Another reason spinoffs do so well is that capitalism, with all its drawbacks, actually works. When a business and its management are freed from a large corporate parent, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility, and more direct incentives take their natural course. After a spinoff, stock options, whether issued by the spinoff company or the parent, can more directly compensate the managements of each business. Both the spinoff and the parent company benefit from this reward system. In the Penn State study, the largest stock gains for spinoff companies took place not in the first year after the spinoff but in the second. It may be that it takes a full year for the initial selling pressure to wear off before a spinoff’s stock can perform at its best. More likely, though, it’s not until the year after a spinoff that many of the entrepreneurial changes and initiatives can kick in and begin to be recognized by the marketplace. Whatever the reason for this exceptional second-year performance, the results do seem to indicate that when it comes to spinoffs, there is more than enough time to do research and make profitable investments.”
How spin-offs unlocks freedom and gains in subsequent years post listing

In the usual case, when a company first sells stock publicly an elaborate negotiation takes place. The underwriter (the investment firm that takes a company public) and the owners of the company engage in a discussion about the price at which the company’s stock should be sold in its initial offering. Although the price is set based on market factors, in most cases there is a good deal of subjectivity involved. The company’s owners want the stock to be sold at a high price so that the most money will be raised. The underwriter will usually prefer a lower price, so that investors who buy stock in the offering can make some money. (That way, the next new issue they underwrite will be easier to sell.) In any event, an arms-length negotiation takes place and a price is set. In a spinoff situation no such discussion takes place.
Instead, shares of a spinoff are distributed directly to parent-company shareholders and the spinoff’s price is left to market forces. Often, management’s incentive-stock-option plan is based on this initial trading price. The lower the price of the spinoff, the lower the exercise price of the incentive option. (E.g., if a spinoff initially trades at $5 per share, management receives the right to buy shares at $5; an $8 initial price would require management to pay $8 for their stock.) In these situations, it is to management’s benefit to promote interest in the spinoff’s stock after this price is set by the market, not before.”
About spin-off exercise price

“Question: How do you make a half billion dollars in less than two years? Answer: Start with $50 million and ask John Malone. He did it. John Malone, CEO of Tele-Communications, took advantage of the spinoff process to create a situation that proved to be one of the great spinoff opportunities of all time. Anyone who participated in the Liberty Media rights offering, a spinoff from Tele-Communications, was able to earn ten times his initial investment in less than two years. Although all shareholders of Tele-Communications (TCI), the parent company, had an equal opportunity to participate in the rights offering (and the whole world had the ability to purchase these same rights), the offering was artfully designed to create the most upside potential for those who participated, while simultaneously discouraging most investors from taking advantage of the opportunity. The entire spinoff was followed closely by The Wall Street Journal (much of it on the front page), yet almost everyone in the investment community missed this chance to make a quick fortune. Hopefully, the next time an opportunity like this rolls around, everyone will pass right by it again—everyone, that is, except for you”
About how rights issues are totally ignored

“TCI officials expected fewer than 50 percent of the eligible shares to participate. But as TCI disclosed details of the plan, Wall Street soured on Liberty’s illiquid stock, complicated asset and capital structure and lack of initial cash flow. John Malone, chairman of Liberty and president and CEO of TCI said he was indifferent to, not disappointed by, Wall Street’s lack of enthusiasm. Even though Liberty’s shareholder meetings can be held “in one telephone booth,” Malone said that in structuring the deal, TCI executives realized it wouldn’t be for everybody. “People had to make up their own minds,” Malone said. “You can get yourself into trouble convincing people to get into things.””
This entire para of read shows how TCI spun off by issuing rights that got exercised by < 50% and the founders made good money

“SPINOFFS: A QUICK SUMMARY Before we leave the spinoff area, let’s take a moment to review some highlights: 1. Spinoffs, in general, beat the market. 2. Picking your spots, within the spinoff universe, can result in even better results than the average spinoff. 3. Certain characteristics point to an exceptional spinoff opportunity: a. Institutions don’t want the spinoff (and not because of the investment merits). b. Insiders want the spinoff. c. A previously hidden investment opportunity is uncovered by the spinoff transaction (e.g., a cheap stock, a great business, a leveraged risk/reward situation). 4. You can locate and analyze new spinoff prospects by reading the business press and following up with SEC filings. 5. Paying attention to “parents” can pay off handsomely. 6. Partial spinoffs and rights offerings create unique investment opportunities. 7. Oh, yes. Keep an eye on the insiders. (Did I already mention that?) And some additional points: 1. Reruns of Gilligan’s Island are boring. 2. “Stealing” can be a good thing. 3. Don’t ask stupid questions at Lutèce. Hey. Why didn’t I just say it like this in the first place?”
Spin offs summary

“Why do companies pursue spinoff transactions in the first place? Usually the reasoning behind a spinoff is fairly straightforward:”
Reasons for spin-offs

“Management believes that the financial and investment communities do not fully understand how to value HSN [Home Shopping Network], in part because HSN is both a retail-oriented company and a broadcast company. Broadcast companies are typically valued based on cash flow while retail companies are typically valued on an earnings-per-share basis”
Cash flow & EPS based valuation for different types of companies

“In January 1994, in a widely heralded move, American Express announced its intention to spin off its Lehman Brothers subsidiary as an independent company. The Lehman Brothers spinoff was actually the vestiges of an old-line Wall Street investment-banking partnership that American Express had purchased in the early 1980s. At the time of the purchase, under the leadership of a previous CEO, the idea was to turn American Express into a “financial supermarket.” Since after a decade of trying no one could figure out what this meant, the board of American Express had decided to spin off the remains of Lehman to shareholders. When the appropriate filings were made in April 1994,1 decided to take a closer look at the “new” Lehman Brothers.”
Lehman Brothers spin-off from American Express

“PARTIAL SPINOFFS”
Partial spin-offs

“The important thing to remember is this: Any time you read about a spinoff being accomplished through a rights offering, stop whatever you’re doing and take a look. (Don’t worry, they’re quite rare.) Just looking will already put you in an elite (though strange) group, but—more important—you will be concentrating your efforts in an area even more potentially lucrative than ordinary spinoffs. You won’t have to waste too much effort either.”

“Institutional investors who own stock in a potato company not only have no interest in the bonds of the new conglomerate; in most cases, they’re not even allowed to own them. The vast majority of pension and mutual-fund managers specialize in either stock investments or bond investments. As a general rule, they’re given a specific mandate to invest in one or the other, not both. Even if they can buy both stocks and bonds, it’s incredibly unlikely that, out of all the available choices of bond investments, the new Toppings bonds are going to head up the list. So, in the end, practically everyone who receives merger securities, whether unsophisticated individual or sophisticated institution, is on the same page—everyone just wants out.
It should come as no surprise, then, that this is where you come in. Not unlike (in fact, incredibly similar to) the dynamics of a spinoff situation, the indiscriminate selling of merger securities, more often than not, creates a huge buying opportunity. Both spinoffs and merger securities are distributed to investors who were originally investing in something entirely different. Both spinoffs and merger securities are generally unwanted by those investors who receive them. Both spinoffs and merger securities are usually sold without regard to the investment merits. As a result, both spinoffs and merger securities (surprise, surprise) can make you a lot of money.”
About how merger securities could be profitable

“old story of the peasant who is brought before the king and sentenced to death. The peasant says, “Oh please, please, your Majesty, spare me! If you let me live just one year, I will teach the royal horse to talk.” “Sure,” responds the king, figuring what the heck, “if you can teach my horse to talk in one year, I will set you free.” On the way out of the royal palace, one of the king’s guards pulls the peasant aside and asks, “Why’d you tell the king that you could make his horse talk? When the year is up, he will surely have you beheaded!” The peasant replies, “I’m not so sure about that. A year’s an awful long time. If I have a whole year, maybe the king will change his mind. Or maybe the king will die. Maybe the horse will die. Maybe, I’ll die. Or who knows? If you give him a year, maybe the horse will talk!””
A good story of extension

“Risk arbitrage—NO! 2. Merger securities—YES!”
Cool

“I may be unduly soured on the area—considering I once had seven deals break on me all at the same time—but with the constant attention required to monitor investments properly and with the other alternatives available to individuals, I believe this is an area best left alone by most investors”
The author suggests to stay away from risk arbitrage

“I didn’t learn about CVRs in business school. I didn’t read any books that described what these things were. No one told me to buy them. I simply read the page in the proxy that told me how they worked. However, I did have an advantage in all this. I did know something that very few other investors knew. My big advantage and what I knew was this: It pays to check out merger securities!”
Merger securities are good

[Mohammed · Rating 5 out of 5]

Five stars for the accessibility and easiness of reading this informative book about special subjects of the investment arena.

[Daniel Ottenwalder · Rating 4 out of 5]

You can be a stock market genius
It pays to look for opportunities that are misunderstood. Sometimes, all it takes is reading and understanding the stakeholder incentives. The author highlights that spinouts present good opportunities though I would note the market sees a lot fewer of these today. He notes the reason as the size will typically lead to pension/mutual funds to throw the horse before the bath water. He then proceeds to highlight a few examples where it paid to do some homework basically if you can mitigate the downside the upside takes care of itself.

The author is not a fan of merger arbitrage given the downside risk if the deal doesn't commensurate but recommends digging into merger securities as these can present opportunity at times.

Bankruptcy can present opportunity if the underlying business is good and was overleveraged but don't buy the common stock once they declare bankruptcy. The bonds and bank debt can be where the value happens if you have a way to determine claim timing and potential return. This is really hard too and this market has become competitive. The best approach is to analyze the new stock after bankruptcy given creditor becomes the new equity holder and usually wall street stops covering the stock. Only bet in the good companies that can survive. Restructuring can also create opportunity.

Recaps and stock stubs - this was a tactic used in 80s to fend off corporate raiders seems like financial engineering given the use of new debt going to shareholders and less going to uncle Sam. The stub stock can be seen as an lbo this can produce pe like returns given the increased debt load

You can create a stub stock by buying LEAPs given it creates leverage.

You need to think about your skill building for these. Everyone can play the spinoff game but options can give you a lot of risk given that leverage.

[InvestingByTheBooks.com · Rating 5 out of 5]

With this his first book, superstar investor Joel Greenblatt tried to bring the process that gave him his early success to the general public. Even though the author is broad within his niche - special situations - the area in itself is specialized and also highly labor intensive making the venture doomed to failure. Instead the book became an instant classic among hedge fund managers.

The basic premise of the book is that it pays off to search for areas where there is a high probability of finding undervalued equities. In contrasts to many other ventures, when it comes to investments you have the possibility to choose your battles and even your playing fields. No one will punish you for not doing something, only for doing stupid things. Therefore you can specialize in a specific type of investing. If there are no immediate opportunities in the chosen area you can always keep money in cash. So how do you find corners of the market where the competition is lower? The underlying theme in Greenblatt’s hunt is change, in the form of spin-off’s, mergers, restructurings, rights offerings, liquidations, asset sales, distributions etc. “Essentially, it all boils down to a simple two step process. First identify where you think the treasure [...] lies. Secondly, after you’ve identified the spot (preferably marked by a big red X), then, and only then, start digging. No sense (and no fun) digging up the whole neighborhood”.

The author dedicates chapters to several types of special situations such as merger securities, corporate restructurings and others. Spin-offs for example, have had a massive outperformance over the three years that follows the separation. The spun-off company’s shares are often sold regardless their merits either as the original investor was interested in the mother company in the first place or because the new company is too small. Combined with the fact that the management gets a real boost from being liberated from the old corporate overhead, this opens up for outsized returns. However, the investor should wait for the selling to ebb out before making his purchases. Which spin-offs offer the best value? Greenblatt advices to let insider buying be the judge of which spin-off’s to invest in.

There will in general be very little possible downside to a stock coming out of bankruptcy. After a bankruptcy the old equity holders will be wiped out and the old debt will have been turned to a combination of new debt and new equity. Hence the equity holders are the old bondholders. As they in most of the cases are fixed income investors the shares will be sold regardless of their merits which will make them cheap. Corporate information from the bankruptcy proceedings is available, most investors will be traumatized from previous ownership and the sell side doesn’t want to touch the stock. The author further advises to seek the good businesses that can deleverage.

There are only a very few books written on special situations investing making the book relatively unique. Despite the slightly esoteric area there is no doubt that Greenblatt is a devoted value investor seeking margins of safety, seeing risk as “permanent loss of capital” etc. He argues for deep research and focusing on the best ideas instead of broad diversification. Over time the portfolio will have many positions and it will have diversified over time instead of at any given time. “It’s better to do a lot ofwork on one idea than to do some work on a lot of ideas”. The book is written in a breezy easy-going style of writing that might fool you into doubting the quality of its advice. This would be a serious mistake. The logic is explained and there are some examples but – to bring up a negative - practical details are in rather short supply.

To succeed is probably two parts being at the right place at the right time and only one part perseverance, skill and intelligence. However, to navigate to the right place at the right time is a rare and underappreciated competence in itself.

[Viney Kumar · Rating 5 out of 5]

A really strong book with compelling insights that were illustrated extremely clearly. I hated the title but loved the book!

[Jack Alexander · Rating 5 out of 5]

Marvelous. I wouldn't recommend that anyone else read this book (lest they steal the fun, new investing strategies that I stole).

[Ricardo Araújo · Rating 4 out of 5]

Não me tornei um stock market genius, mas a culpa acho que foi do leitor

[Jeff · Rating 4 out of 5]

Excellent book. Even though it was written in '97, most of the information is still relevant today.