Top 4 Strategies to Beat the Market From "You Can Be A Stock Market Genius" by Joel Greenblatt
Beat the market with the strategies Greenblatt used to earn 50% annual returns over more than a decade
Even though You Can Be A Stock Market Genius was written in 1999, the opportunities within the secret hiding spots of the market still exist today. The special situations that Joel Greenblatt present to us in this book still exist today.
Why do these investment opportunities still exist a quarter century after this was first published? The answer comes down to money. Many opportunities in the special situation investing corner of the market are too small for big money managers to take advantage of.
This gives individual investors, who have smaller investment accounts, a huge advantage in the markets. As to what these opportunities are, keep reading. But first let's talk about the author.
Greenblatt is one of the most successful stock investors of all-time
Joel Greenblatt not only beat the market when he was spearheading the investments for Gotham Asset Management, he crushed the stock market.
Over a period of time stretching over a decade his hedge fund, Gotham Capital, averaged annual returns over 50%. That's incredible - a run that great over long periods of time is unheard of in today's world. These returns make him one of the most successful fund managers of all time. Beating even the best portfolio managers including Seth Klarman and Peter Lynch.
The last I heard, Greenblatt is a member of the adjunct faculty at the Columbia Business School where he teaches "Value and Special Situation Investing." The Columbia Business School professors are among the greatest investors including Benjamin Graham - the father of value investing. As well as grooming some of the top investment experts of all-time including Warren Buffett, Tom Knapp, and Bill Ruane.
But I digress. At Columbia Greenblatt teaches the special situation investing style he made famous in You Can Be a Stock Market Genius.
Strategy #1: Spin-offs
In stock investing, spin-offs are when a company sells off its assets or parts of itself to another company. This can be done through an initial public offering (IPO) or it can be done privately. In either case the new company will usually pay more than the old company because they're buying something valuable.
For example, if you own shares in General Electric Company (GE), you might see them split into two companies. As GE did with NBC Universal. One part would become Comcast while the other part became GE. If you owned GE before the split, you'd get paid twice for your original purchase price. Once from the sale of GE and once from the sale of Comcast.
If you bought GE at $30 per share and sold it at $40 per share, you'd receive $10 per share. You'd also receive $10 per share from the sale of Comcast which would bring your total return to $20 per share.
Another example was Exxon Mobil (XOM) which spun off their refining business into a separate company called Valero Energy Corporation (VLO).
Spin-offs can be a great opportunity to smart people to earn extra profits. Sometimes the company being spun off is sold en masse by investors. There can be lots of reasons for this, but the selling can get overdone, making it a cheap stock.
Or sometimes the company being spun off was ignored or overlooked by investors under the big corporate umbrella that previously housed it. And now as a free company, it can pursue a more visible path and gain investors interest.
Either way, this is a great opportunity for investors to earn an above average return on capital.
Strategy #2: Corporate Restructurings
A corporate restructuring is when a company reduces their debt load by selling off assets or splitting themselves up into different divisions.
This restructuring can cost the company money in the short run, bringing down profits... And making the company's long-term prospects look worse than they really are.
An investor skilled in security analysis can dig deep and look behind the curtain to see what's really going on at the company. And if the company successfully restructures, it's stock is likely to soar higher in the following months and years.
Strategy #3: Merger Securities
Greenblatt defines merger securities as stocks issued by companies who have agreed to merge with each other.
The idea here is that the company being acquired typically trades at a discount to the purchase price. And investors can buy these companies and wait for the stock prices to match the acquisition price. This is also called merger arbitrage.
This can be a great way to make big stock market profits. But you must be careful to do your due diligence on the deal. Because if it falls apart, the stock price of the company being acquired is likely to head lower... And you may not be able to get back your entire initial investment.
Strategy #4 Rights Offerings
Sometimes, albeit with increasing rareness, common stocks will issue a rights offering in conjunction of a spinoff. In Greenblatt's words
"Any time you read about a spin-off 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 spin-offs.”
I don't see any active rights offerings right now, but if Greenblatt says it's something to look for, we should look for it.
That's the Gist of it...
Those are the four main strategies for average investors to beat the market. This article is just meant to scratch the surface of this book full of investment advice for those looking to purchase individual stocks.
If you want to learn more about Greenblatt's proven strategies, I highly recommend purchasing the book and reading it cover to cover.