New Threads Only:  Add to Google Reader or Homepage
New Threads & Replies:  Add to Google Reader or Homepage
Forums are for serious investors only. GuruFocus Forum Rules.

Forum List » Guru News and Commentaries
Guru News, Stock picks and commentaries
New Topic
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicLog In
Greenblatt’s Advice on Special Situations
Posted by: guruek (IP Logged)
Date: July 17, 2009 10:55PM

Often it is only in retrospect when it becomes possible to identify cases in which one has inadvertently followed herd like behavior rather than profiting from it. In such cases, rather than kicking yourself at the time mistakes were made, you can proceed to do so years after the mistake was made. I was kicking myself recently for making a mistake in 2004 that I previously recognized as a financial mistake but now realize that it was motivated by herd like behavior which I consider to be a sin much larger than a mere financial loss.

While reading Joel Greenblatt’s book, You Can Be a Stock Market Genius, it occurred to me that I exhibited the exact behavior that he predicted when I almost immediately sold the shares in Hospira that I received from Abbott Laboratories’ spin off of the subsidiary in 2004. Since I had purchased shares of Abbott based on the overall characteristics of the parent company rather than the attributes of any one unit, I viewed the relatively small position I received in Hospira as a distraction that was not worth the time required to own (in terms of keeping up with corporate developments, reading reports, etc).

Hospira proceeded to nearly double over the next eighteen months, following a predictable decline immediately after the spin off caused by people like me who felt a need to sell. Perhaps the fact that the net proceeds of the sale amounted to $666 should have provided a clue that something was terribly amiss in my decision making process?

Excuses, Excuses …

Sure, I can make the excuse that I did not have time to research Hospira because I happened to be a part time “evening and weekend” investor at the time, but there was no excuse to not carefully examine the spin off situation and determine the underlying economics and psychology that may cause pricing inefficiencies to emerge. Indeed, spin offs are covered in quite a bit of detail in Mr. Greenblatt’s book where he makes the point that selling pressure often afflicts the spun off shares in the short run because the recipients are not interested in holding small positions in a company that did not drive their original decision to invest in the parent. Furthermore, many professional investors are forced to liquidate such positions because they may not meet market capitalization requirements or adhere to the style of the manager’s fund.

Clearly, I should have more closely examined the filings related to the spin off and considered the merits of buying more Hospira rather than selling my relatively small stake. Simply because the spin off accounted for only a tiny position did not preclude me from considering the merits of the company and taking a full position.

Can Individual Investors Really Participate?

Many individual investors, even those who consider themselves to be “enterprising investors”, often question whether they have any real edge over professionals managing billions of dollars. In fact, Mr. Greenblatt argues that individual investors have significant and enduring advantages due to managing smaller portfolios, not being limited by restrictions such as the mandate of a fund, and being able to pick and choose from opportunities that may have passed under the radar of the larger players.

The book also provides guidance on what areas to avoid. Mr. Greenblatt makes a good case for avoiding risk arbitrage scenarios but identifies other interesting ways to profit from mergers and acquisitions. Bankruptcies and recapitalization opportunities also receive quite a bit of space in the book.

Although some of the examples and advice related to information sources are outdated given that this book was published in 1997, the concepts that are covered should be applicable in today’s market because the basic forces at play remain intact. Mr. Greenblatt also delivers all of this information in a humorous style that is both quick to read and entertaining.

While the majority of individual investors are probably not suited to participate in special situations, this book can provide important guidance for those who are. Based on the battered condition of the book that I borrowed from my local library and the dozens of due dates listed, it is apparent that I am not alone in benefitting from this advice, albeit twelve years after I should have taken the time to read the book!

Disclosure: The author does not currently own shares in Abbott or Hospira.

Ravi Nagarajan
www.rationalwalk.com



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 3.2/5 (19 votes)



Re: Greenblatt’s Advice on Special Situations
Posted by: value_barbarossa (IP Logged)
Date: July 17, 2009 11:51PM

I enjoy this book, and have a copy on my shelf.

I've been tempted to rip the cover off though...it's a bit embarrassing.



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 2.9/5 (9 votes)



Re: Greenblatt’s Advice on Special Situations
Posted by: Sivaram (IP Logged)
Date: July 18, 2009 01:33AM

I should probably check out the book but do you know why he says risk arbitrage should be avoided?



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 3.1/5 (8 votes)



Re: Greenblatt’s Advice on Special Situations
Posted by: buffetteer17 (IP Logged)
Date: July 18, 2009 06:19AM

Risk of sinkholes.

In 1985 Sea World announced that an acquisition agreement had been reached with Florida Cypress Gardens. A few weeks before the deal was scheduled to close, Cypress Gardens fell into a sinkhole. According to the Wall Street Journal, "The company ... said its tentative agreement to be acquired ... could be affected."



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 2.2/5 (9 votes)



Re: Greenblatt’s Advice on Special Situations
Posted by: rnagarajan (IP Logged)
Date: July 18, 2009 06:31AM

Yes, his views on risk arbitrage is that the typical risk/reward scenario is not sufficient. Usually, after an announcement is made, there is only a small move left in the acquiree, and although it may appear great when annualized, the risk of a deal falling through could result in much larger losses, particularly if the stock is being taken out at a large premium. Often the stock could fall back to prior levels or worse.

Yes, the title is kind of "infomercial" like but the book is top notch. Some of the humor is a bit overdone as well, but the content and ideas are really what counts.



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 2.9/5 (11 votes)



Re: Greenblatt’s Advice on Special Situations
Posted by: bearuo (IP Logged)
Date: July 18, 2009 06:38AM

"Some of the humor is a bit overdone as well" ... C'mon give us a big smile and tell us some funny stuff like our heroes, WEB & JG always do. It's only money :))



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 2.9/5 (9 votes)



Re: Greenblatt’s Advice on Special Situations
Posted by: rnagarajan (IP Logged)
Date: July 18, 2009 06:39AM

Don't get me wrong, I liked the humor! But it WAS a bit overdone!



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 2.4/5 (10 votes)



Re: Greenblatt’s Advice on Special Situations
Posted by: David Pinsen (IP Logged)
Date: July 23, 2009 07:05PM

I mentioned this elsewhere, but there was a funny comment about Greenblatt's book at the Amazon link for it:

Look before you LEAP

I get up in the morning and walk my dog on the walking path just off the beach (Pacific Ocean adjacent). On my walk I always say hello to Mrs. Rothchild who is reading the Investor's Business Daily while sitting on her polished teakwood patio set. I jibe her that she should switch to the Wall Street Journal and get a real job investing like I do. After a quick but nutritious breakfast, I settle down to my state of the art computer where I E-trade my way to this lavish lifestyle I currently enjoy (takes no more than an hour!). After my "investing", I'll cruise PCH in my new convertible BMW and work on that driving tan. Thanks Joel Greenblatt!

What the heck? Oh drat, the alarm went off. I was having that dream again; now I must get ready for the drive to Pomona in my '98 Daewoo. So kick me, I am not yet a stock market genius. Can I be if I apply the lessons of this book? Maybe... but I have neither the time nor the money. For the person with both it might still be a great idea to have a stock market genius walk them through the paces for a few months.

On the merits of readability, Greenblatt dishes out the drudgery in a well presented and entertaining style. You get case studies, nifty chapter summaries, advice not to run through dynamite factories with lit matches, and a Gilligan's Island hit in the glossary (not bad for fourteen Yankee Dollars).

P.S. All you reviewers and review readers out there, have any of you struck pay dirt following the advice in this book?


My signature: I blog at [steamcatapult.com]



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Stocks Discussed: HSP, ABT,
Rate this post:

Rating: 2.7/5 (11 votes)





Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat

{{numOfNotice}}
FEEDBACK