This article is an excerpt from the Shortform book guide to "You Can Be a Stock Market Genius" by Joel Greenblatt. Shortform has the world's best summaries and analyses of books you should be reading.
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What are good investment strategies for beginners? How do you choose investments when you’re just starting out?
Investment strategies for beginners include doing original research, value investing in bargain stocks, and focusing on your portfolio. When you’re just starting out, it’s a good idea to gather as much information as you can about potential investments.
Learn more about how to choose investments with these tips from hedge fund manager Joel Greenblatt.
How to Choose Investments as a Beginner
Investing firms can overwhelm laypeople with their sheer range of options: actively managed mutual funds, passive index funds, exchange-traded funds, and more. But according to hedge fund manager Joel Greenblatt, the amateur investor doesn’t need any of these options to earn above-market returns. On the contrary, in his 1997 book You Can Be a Stock Market Genius, Greenblatt details investment strategies for beginners with an approach called special-situation investing, which can yield lucrative returns that outperform the vast majority of investing funds.
To outline this approach, Greenblatt 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. He discusses why corporate spinoffs often create incredibly cheap stocks, why bankruptcies can lead to underpriced equities, and why stub stocks can provide exponential returns with limited downside risk.
As the founder and co-manager of Gotham Asset Management, a hedge fund with a $4.6 billion portfolio as of September 2023, Greenblatt distills years of concrete financial experience and expertise into his discussions about investment strategies for beginners. Having authored several other public-facing books, such as bestsellers The Little Book That Beats the Market and The Big Secret for the Small Investor, Greenblatt is skilled at making dense financial concepts accessible to the uninitiated.
In You Can Be a Stock Market Genius, Greenblatt considers the following investment strategies for beginners:
- Investing in the new securities resulting from spinoffs and bankruptcies
- Purchasing securities arising from companies undergoing acquisitions or restructurings
- Making leveraged investments in the form of stub stocks and long-term calls
In this article, we’ll focus on the foundational concepts that apply in all of these situations.
A Brief Introduction to Value Investing Strategies for Beginners
According to Greenblatt, successful special-situation investing rests on the foundation of value investing, which prescribes purchasing stocks at less than their fair value. He argues that by practicing special-situation investing, value investors can profit handsomely.
Greenblatt explains that value investing essentially involves finding bargain investments. To illustrate, imagine that you’re a baseball card collector who regularly sells baseball cards at auction and you find a card at a garage sale that costs $50. If you know that collectors have recently bought this card for around $100, then the card at the garage sale is underpriced—it’s selling for less than its true value. Thus, by purchasing the card at $50, you can make a profit of $50 by selling it for $100 at auction.
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Here's what you'll find in our full You Can Be a Stock Market Genius summary:
- How amateur investors can earn above-market returns
- Why special-situation investing can outperform most investing funds
- When you should invest in "new" companies
