Today I will put up my notes on another book by Joel Greenblatt (Trades, Portfolio). Hope it helps!
Key points
- After purchasing 6-8 stocks in different industries, the benefit of adding more stocks to decrease risk is small.
- Overall market risk will not be eliminated by adding more stocks.
Some simple basics:
- Do your own work.
- Don't trust anyone over 30.
- Don't trust anyone 30 or under.
- Pick your spots.
- Don't buy more stocks, put money in the bank.
- Look down, not up (margin of safety).
- There's more than one road to investment heaven.
- Corporate events to look out for: spinoffs, mergers, restructuring, rights offerings, bankruptcies, liquidations, asset sales, distributions.
- Invest in what you know and understand.
Spinoffs:
- Institutions don't want it (and their reasons don't involve the investment merits).
- Insiders want it.
- A previously hidden investment opportunity is created or revealed.
- Rights offering with spinoff (oversubscription privilege is a bargain).
- Check out the motives of insiders.
Risk arbitrage and merger Securities
- Opportunity in merger securities (bonds,preferred stocks or other securities offered to sweeten the merger deal).
Bankruptcy and restructuring
- For bankruptcy, stick to companies with strong market niche, brand name, franchise or industry position.
- Don't buy common stock of bankrupt companies. Look for new issues that just came out from bankruptcy.
- Corporate restructuring. Selling off major businesses to stop losses, pay off debt or focus on promising business.
- Look for limited downside, attractive business to restructure, and well incentivized management team.
- Magnitude of restructuring must be significant relative to size of total company.
- Invest in a situation after major restructuring has been announced, or invest in a company that is ripe for restrucuting.
Reacpitalization and stub stocks, leaps, warrants and options:
- Recaps: issue bonds to lever and distribute cash to shareholders.
- Stub stock: the stock after the recap.
- Invest in the stub stock to make money.
- Look for leveraged spinoffs instead as recaps are not common now.
- Create your own stub stocks with LEAPS calls.
- Warrants are issued by underlying company and can have maturity dates of more than 2.5 years.
- Use options with spinoffs, corporate restructuring, merger.
- Buy options that expire several weeks or several months after spinoff is done.
- In restructuring or stock mergers, the date of significant cash distribution or date of sale of assets can correspond to significant stock movements.
- In mergers, if acquisition is paid with stock, closing date of merger can be catalyst for major price moves.
Where to get ideas
- Michael Price, focus on value and special situation, look at those holdings which is close to his average purchase price
- Marty Whitman of 3rd Avenue
- Richard Pzena (Trades, Portfolio): good for LEAPS ideas, check his 3 or 4 largest holdings
- 10k (annual report), 10Q (quarterly report)
I believe this book is another gem for investors. So do read it to get more insight!
