The author Joel Greenblatt returned an astounding 40% per year compounded during a 20-year period from 1985-2005, the greatest publicly recorded return for a large fund. If I could get even half of that over a 20-year period, that would be golden. Consequently, let’s study one of the books he published that you can be a stock market expert, and see if the strategies involved can be replicated. 

-chapter 1

-the best way to make money is to look at stocks no one else is looking at, or that few people look at; the small caps

Chapter 2

-you should be paid for doing your homework and investing in hidden moats when it was heavily in my favour; not hidden bad companies

-Analysts offer the same useless analysis

-Wall Street avoids: small companies, special situations, obscure securities, OTC stocks. Those are the exact places to look.

-right before or during a catalyst is when price moves the most

Chapter 3 – spinoffs

-pick investments in hidden areas but also the right areas. Starting with the right areas will already lead to better choices

-Spinoffs; both the parent and spinoff outperform; 6 and 10% in first three years. Initially they are both sold so the price is low (buy) and next few years they do well as separate entities.

-evaluate if the spinoff is good

-good signs: institutions don’t want it (for non-investment reasons), insiders do.

-if the spin off company is still tied to parent via loans or insider ownership, then it is not intended to die off

-in a leveraged spin off, if they eventually go up after 1-2 years, from the leverage they will rise more quickly. After initial selling, host Marriott went up 3x in 4 months

-spin off SEC documents may not be available for another half year, and spin off may not occur for a year from initial announcement time

-Greenblatt does not typically like to buy stocks with high P/E ratios as this leads to more chance of price loss if growth doesn’t meet high expectations

-stocks under $10 are typically ignored by institutional investors

-spin offs may be setting up for acquisition targets

-some businesses offer low net income and very high cash flows

-extract value via spinoffs as both entities are undervalued

-home shopping network and silver king and precision systems went on to appreciate dramatically within a year or two after trading at 1/5 to 1/10 of value of net income and cashflow

-Wall street hates uncertainty

-sometimes, if the parent company is good enough, priced cheap with high future growth prospects, you can buy even before spinoffs before large investors do. E.g. American Express Joel Greenblatt got in then Warren Buffett purchased nearly 10% of the company only 6 months later

-partial spinoffs are good because you can take advantage of arbitrage in either the parent or the sub

-watch for management incentives and stock options; it could first want a low stock price for the options to work. Read SEC filings

-if quietly warrants for spinoffs are given out for free or sold, those may be extremely lucrative, especially if insiders are getting them too, or other rights offerings

-a stock can be made unattractive by intentionally having less shares at a higher per share price

-do your own work; often, the institutions are wrong and don’t do the work and have the story wrong (either intentionally or unintentionally). Often, with hidden value, institutions and almost everyone cannot see it and are negative and won’t do the work, citing complexity, illiquidity

Chapter 4 – risk arbitrage and merger securities

-risk (merger) arbitrage; take advantage of small spread of jump in stock price and acquisition price before deal is official; deal may not go through however. Short the security that will no longer exist and buy it. Very risky as would have to be first to information. Small payoff if successful, huge downside if not.

-Merger securities: cash and stock and some other proceeds offered in purchase. The other assets are usually put on fire sale by retail and institutional investors, which will lead to them to be temporarily distressed and able to buy for a bargain

-warrants are often thrown in for free, and can be purchased at a deep discount. They look like options however. They are only worth buying if there is nest certainty the underlying stock does well, otherwise the value of the warrants drop to zero. Look for these “throw-away parts” in mergers or acquisitions

Chapter 5 – bankruptcy and restructurings

-it is rarely a good idea to hold stock or purchase of a company filing for bankruptcy

-after a company bankrupts, old shareholders get wiped out. Creditors become new shareholders. Registration statement filed with SEC. The statement tells us about company brought about new. New shareholders typically don’t want the stock anymore. Some good, some not. Buying mergers is far better, or spin offs.

-Buying small companies is the way to go as too many big players disregard them as there market cap is too small and not worth there time

-trade mediocre companies, invest in the good. Good companies you find and keep for the long term. Temporary situations you sell once the value is realized; gain from fundamentals won’t occur

-restructuring; when a company sells a money losing division, to boost future earnings, in a non-distressed situation.

-buy smaller companies, less followed companies, immediately after restructuring, or even better but more difficult, before. Restructurings are a sign of good management as they admit the mistake.

-Once these temporary situations get out to mass media; that may be the time to sell. As, either the price ran up big time and has a lot of downsides from others selling, or it may stagnate for a while. Can hold long term if the company shows it can execute

-General Dynamics sold aspects of the business. Even Warren Buffett came in late, at $75 after it started at $25 at the announcement. Buffett bought 4m shares at $75 for $300m for 15% of the company. So that means these small $1-3billion market cap companies with these opportunities that I’m invested in is correct. If this pans out I might have to do more of these reverse merger SPACs. It ended up going up 6x in just 3 years, general dynamics, from $25 to $150

Chapter 6

-recapitalization: company issues bonds or preferred stock to its own shareholders and results in a created stub stock. This increase leads to increased interest payments and thus reduced net income and thus tax saved; the stock as well as a stub stock will be worth more, essentially maximizing current value. Or, repurchase own stock via debt, cash, bonds or preferred stocks.

-investing in leveraged spinoffs or leveraged recapitalizations, if chosen correctly, offer immense value to the enterprising investor (multiples per year)

-recapitalization; offer new shares with cash or other assets in exchange for old shares. Increased prices and debt

-LEAPS; long term out of the money call options (day with 2-2.5 year expiry dates, way out of the money so the premium is very low) are a way to make monstrous amounts of money. Asymmetric risk/reward scenario

-Warrants; issued directly by the company, offers investors right to buy stock at a set price during a time interval. Buy directly from the company if exercise. I think cash settlement is not an option here.

-Options are especially good in extraordinary or fast changing situations where options traders cannot keep up and fail to adjust premium costs. Take advantage of these situations.

Chapter 7

-read when you have the time and when you want to; it’ll be way more productive. Must pick spots wisely with limited time, energy, and money; a good filter, as Philip Fisher said. Additionally good reliable sources for picks

-money is time; money buys time, time buys life

-special situations exist in a bull or bear market

-additionally, stock market over the long run reflects fundamentals

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.