Book SummaryYou Can Be a Stock Market Genius, by Joel Greenblatt

1-Page Summary1-Page Book Summary of You Can Be a Stock Market Genius

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 argues that an approach called special-situation investing 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...

You Can Be a Stock Market Genius Summary The Foundation of Special-Situation Investing

Before exploring the specific situations that offer lucrative investment opportunities, Greenblatt discusses the fundamentals underlying these opportunities. In this section, we’ll analyze these fundamentals, focusing first on how value investing lies at the core of Greenblatt’s approach and then proceeding to Greenblatt’s general tips for special-situation investors.

A Brief Introduction to Value Investing

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...

You Can Be a Stock Market Genius Summary Investing in “New” Companies: Spinoffs, Partial Spinoffs, and Orphan Equities

Having discussed Greenblatt’s general strategies for special-situation investing, we can now proceed to the first group of special investing situations—those arising when established companies beget new companies and stocks. In this section, we’ll focus on three such situations: spinoffs, partial spinoffs, and orphan equities.

How to Profit From Spinoffs

Spinoffs occur whenever a parent company decides to jettison one of its subsidiaries or divisions and create a fully independent company. According to Greenblatt, investing in spinoffs can yield above-market returns because shareholders of the new spinoff often seek to hastily sell their shares.

Greenblatt clarifies that when a spinoff occurs, the parent company typically distributes shares of the spinoff to existing shareholders. For example, if Warren Buffett’s company—Berkshire Hathaway—decided to spin off Dairy Queen, one of its subsidiaries, then Berkshire Hathaway might distribute shares of Dairy Queen to its current shareholders to compensate them for the value lost when it jettisoned Dairy Queen.

(Shortform note: Spinoffs are similar to Initial Public Offerings (IPOs), as both result in the creation of a new...

You Can Be a Stock Market Genius Summary Investing in Evolving Companies: Acquisitions and Restructurings

In addition to the new investment opportunities arising from spinoffs and bankruptcies, Greenblatt also discusses how pre-existing companies undergoing significant changes can yield lucrative investments. In this section, we’ll discuss two such changes: acquisitions and restructurings.

How to Profit From Companies Undergoing an Acquisition

Acquisitions occur whenever one company purchases a majority of another company’s stock from its shareholders, thus giving the acquiring company controlling interest in the acquired company. Greenblatt argues that acquisitions can create promising investment opportunities because so-called merger securities are often sold at bargain prices.

Merger securities, Greenblatt explains, are securities given to shareholders of the acquired company in addition to cash. For example, if Apple decided to purchase Microsoft at the start of 2023, then Apple might pay Microsoft shareholders (say) $275 per share, in addition to $10 per share of five-year Apple bonds that return 6% annually.

(Shortform note: The term “merger securities” is somewhat of a misnomer, since there’s a distinction between mergers and acquisitions. While mergers...

You Can Be a Stock Market Genius Summary Investing in Leveraged Companies: Stub Stocks and LEAPS

Having seen how evolving companies can give rise to promising securities, Greenblatt turns to consider the more specialized opportunities that arise when companies are heavily leveraged—in other words, when they take on debt. In this section, we’ll discuss why highly leveraged stub stocks are desirable investments and then examine how long-term equity anticipation securities provide similar benefits to stub stocks.

How to Profit From Stub Stocks

Stub stocks, Greenblatt clarifies, emerge whenever a company chooses to recapitalize—that is, when it pays shareholders either cash or other securities so it can repurchase large quantities of its own stock. Greenblatt argues that stub stocks provide a favorable investment opportunity because they amplify companies’ increases in earnings while limiting downside risk.

First, to see what a stub stock might look like, imagine that at the beginning of 2023, when trading at $85 per share, Amazon distributed $60 per share in bonds to its shareholders to repurchase Amazon stock. In theory, because Amazon returned $60 of its value to its shareholders, this should drop the value of Amazon...

Shortform Exercise: Reflect on Greenblatt’s Investing Strategies

Greenblatt’s special-situation investing is foreign to most investors, whose portfolios are typically managed by professionals in charge of investing funds. In this exercise, reflect on your own investments and consider whether Greenblatt’s approach could complement your portfolio.

Which stocks comprise your investment portfolio? What was your rationale for investing in these stocks?