‘You Can be A Stock Market Genius’ by Joel Greenblatt is an excellent book that helps the reader understand the nuances of investing in stock markets and how to make money out of some special situations.
The best part is that while the examples quoted in the book are from the US, the investment strategies are very much applicable in the Indian context.
Let’s see how.
Joel Greenblatt is of the opinion that as an individual investor, you don’t need to do extensive research to find undervalued stocks.
Instead, he suggests an approach where the investor needs to do some work, pick up the right spots and look in places where no one else is looking, and that would be enough for him to make a bang for his buck.
So in all essence, this book is not a generic investment strategy book. It’s a treasure that talks about specific situations that happen in the lifetime of a company and how an individual investor can benefit from such situations.
Some of these special situations can be:-
- Spin offs
- Rights offerings
Joel Greenblatt’s approach is simple and clear – Identify what the insiders are doing and take your shots accordingly.
Insiders include the promoters, the management and the employees.
Almost across all the mentioned scenarios, Joel suggests that an investor should watch out for the actions of the insider group, and one should enter into an investing position only if the insider group has retained their investment position in the company.
If the insider group places faith in the company, so should you.If the insider group places faith in the company, so should you. Click To Tweet
Simple, but not so simple.
In addition, he makes multiple references to behavioral finance.
His point is that when the above mentioned situations happen in a company, the existing retail investors and large institutional investors behave irrationally, sometimes out of stupidity and sometimes due to established thinking process.
And that is your chance to make big money.
The author validates this position through a case study as mentioned below:-
In mid 1990s, Marriott Corporation split into Marriott Host and Marriott International.
Marriott Host retained all the company’s debt (i.e. the hotel properties) while Marriott International had the good parts of the business (i.e. hotel management and servicing business which is asset light but generates the most cash).
Around 10% of the group value along with 90% of the debt went to Marriott Host. That made it an awful investment decision.
But then, here’s where Joel had a contrarian view of the situation:-
- The CEO of erstwhile Marriott Corporation became the new CEO of bad Marriott (Marriott Host), obviously with a fat remuneration in form of equity. That means the CEO is putting his career on stake for a supposedly awful part of the company (just FYI, the CEO in his earlier role helped Donald Trump turn around his gambling business). Clearly, there were big plans for Host Marriott and this becomes clue #1 for an investor.
- Additionally, the Marriott family retained 25% of bad Marriott after the spin off. They could have easily exited from Marriott Host but they didn’t, and that becomes our clue #2.
- Next, Marriott Corporation was a blue chip stock of its time. That means big funds would have invested in it. After spin off, Marriott Host won’t be a worthwhile investment to hold because of its small size. Also, holding a business that is debt ridden is not exciting, however holding the cash cow business definitely is. So any sane institutional investor will sell the Host stock and retain International stock; all without doing much research. This will make Host stock become available at a bargain.
- Same is the case with retail investors. Media has projected Host as an investment not worthy of holding. As a result, the retail investor group will also sell the Host stock after spinoff.
In all, Joel puts his faith on the insiders. His assumption was that Marriott Host will turn around in future and hence it made sense to invest in the stock. That was even when it was receiving flak from all quarters.
And the result, the Host Marriott stock tripled within four months of the spinoff, making the author rich.
This gives us a glimpse of Joel’s thought process while making an investment based on a specific scenario.
If you loved the story and the reasoning I mentioned above, you will also love this book. There are many more such case studies which make this book a delight to read.
Just one caveat, this book is not for beginners.
One needs to have knowledge of basic investment principles and how to interpret & calculate PE ratios and book value etc.
If you have an understanding of these concepts, don’t wait anymore.
Go and get this book from Amazon by clicking here.