I’ve been on an investing book kick lately, and I recently read Joel Greenblatt’s classic (from the 90s), You Can Be A Stock Market Genius. Michael Lewis mentioned the book more than once in The Big Short, indicating that it was the manual for the handful of financial whizzes who predicted the near-collapse of capitalism in 2008.
I found the book inspiring, and a little dangerous. The key takeaways were:
- Pay attention to spinoffs: they might make you rich
- Follow the incentives. If insiders are getting a piece of the action, you’ll want to be there.
- When institutional investors exit, prepare your entrance (sometimes)
All good thoughts, in general. The danger is that, to invest like Greenblatt (and with over a decade of 50% CAGR, you want to invest like Greenblatt), you have to do some mind-numbing work or, as Greenblatt puts it, you have to at least read the filings. Let me repeat that: you have to do some mind-numbing work.
How is it that such huge investment opportunities could be laying out in plain site, anyone’s for the taking? What better explanation than that these ‘opportunities’ are buried under a steaming pile of soul-crushing legal-eze? And that’s really the point of both this book and Lewis’ The Big Short. It’s also the point of Malcolm Gladwell’s excellent essay Open Secrets.
If you had only known where to look, and you had the toothpicks to keep your eyes open for a few all-nighters with the most boring reading of all time, you could have shorted Enron, gone long on the explosive corporate restructurings of the 90s and early 2000s, and then put everything in Credit Default Swaps in late 2007. You’d be richer than Soros.
If you’re willing to try your hand at prospecting, there’s no better place to start than the SEC database of recent spinoff filings. Read them, one by one. Here are a few things to look for:
- What are the management stock options? What’s the buy price? How do they work?
- How big is the spinoff relative to the parent? If it’s relatively small, institutions may initially unload it, and that’s when you’ll want to buy.
- To what extent will the spinoff unleash some previously obscured value? If the parent has a low margin, but the spinoff margin is high, investors are likely to flood in.
I might see you on the other side. Then again, I might sit this one out.