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Book Review by Ronaldo Jenkins: You Can Be a Stock Market Genius

  • June 19, 2024

Ronaldo JenkinsEditor’s Note: This is the eighth book review we are publishing as part of our Get Paid to Read contest. Last week, we published Thinking, Fast and Slow by Daniel Kahneman which was reviewed by Rupert Brauch.

This week, Ronaldo Jenkins reviews You Can Be a Stock Market Genius by Joel Greenblatt. Ronaldo, who now works as a Policy Analyst at the Illinois Commerce Commission, has spent over 30 years in public service.

YouCanBeAStockMarketGeniusWhen I first came across this author’s 1997 work in its audiobook format, I had to get a hard copy of the book for my library. As an avid reader of investment and trading books, it was clear to me that Mr. Greenblatt had written a valuable reference on the obscure topic of special situations investing. Given the constant repetition of the same type of investing approaches, it was refreshing to read about a unique area to seek above-average returns.

Not since the five books (1955–1970) from Maurece Schiller had I found an author who could provide an easy-to-read, practical guide filled with case studies on this difficult topic. This book by Mr. Greenblatt validates Schiller’s investment approach and uses more familiar case studies.

By special situation investing, I mean the following types of corporate transactions:

  • Spin-offs and Rights Offerings
  • Mergers
  • Bankruptcies and Restructurings
  • Risk Arbitrage

I really appreciate how the author, at the beginning of the book, encourages the average investor to seek out these unique opportunities. Of course, Joel Greenblatt had the investing track record to back up his claim that you can make a lot of money with special situation investing. He founded Gotham Capital, a private investment firm,  which from 1985 to 1995, grew $52 for each $1 invested.

Greenblatt argues that special situation investing can yield lucrative returns that outperform the vast majority of investing funds and managers. To outline this approach, the author examines an array of uncommon situations in the corporate world that spawn various promising securities (financial assets that you can buy and sell) at bargain prices—including spinoffs, stub stocks, and spun-off equities like warrants and preferred stocks.

The book is loaded with case studies taken from the real world. This book wasn’t written as a stuffy academic tome, and his interpretation of these case studies is often sprinkled with humor. At its root, special situation investing is a subset of value investing where the corporate transaction may yield a bargain for the investor. There are risks involving uncertainties about whether the transaction will occur, but the return can be reasonably estimated by the investor.

Greenblatt assumes that the reader has a reasonable degree of comfort with financial statements and value investing strategies. The use of LEAPS and options in special situations is covered, but these instruments should be avoided by all except for the most advanced investors (as per the author’s advice). Also, professionals working in the field of event-driven investments would probably find little they did not already know.

The book’s format is well thought out: each chapter explains the how and why of investing in each type of corporate event. Classic value investing books like “The Intelligent Investor” tell you what value investing is (i.e., buying businesses at a big discount to intrinsic value). Mr. Greenblatt tells you why these situations exist (i.e., spin-offs, restructurings, etc.) and how to identify these situations and recognize the catalysts that will bring a stock’s price back closer to intrinsic value.

The book provides very real insights into how to profit from these unique corporate events. My personal interest is investing in spin-offs, and this book arms you with the knowledge that you can apply to your own investment research.

Who should read this book? Beginners should first read books by Peter Lynch, Ben Graham, and Phillip Fisher before tackling this book. The strategies the author shares, in my opinion, are not for the novice investor. They require a detailed knowledge of finance, accounting, and investing. But for those with some knowledge and experience, it provides strategies not correlated with typical investment strategies. The teaching technique of first describing the technique and then showing case studies works well. It is one thing to discuss theory, but another to show a real-world application.

A reader might ask whether the book is out of date. Haven’t times changed significantly since the 90s?  There is a two-part response to that question.

First, the true value of a book to add to your library is the timeless lessons contained therein.

If it were easy, everybody would be a billionaire. It requires a lot of work—identifying situations and reading lots of regulatory filings to figure out the nuances of certain transactions/situations. That is also why, decades after this book was published, people can still find these situations to generate abnormal returns—precisely because many investors may not be willing to put in the time and effort to define the opportunity.

Second, we live in an age where so many information tools are available. Joel Greenblatt has since written the Magic Formula books for novice investors to follow. This simple methodology works to a certain extent to give you better-than-average results, but not the potential for phenomenal return situations identified in this book. By using the latest information sources and applying the lessons learned from the case studies in this book, an investor can seek out these special situations.

One of the best investing books I’ve ever read. I highly recommend this book be added to your own personal library!