No other book has had as much of an impact upon my investment strategy as this. Many of the tactics we use are lifted directly from the pages of You Can be a Stock Market Genius. Author Joel Greenblatt argues that the world is full of constrained counterparties, who must act based on something other than price, and the actions of those counterparties may create phenomenal opportunities for investors who know where to look. What was applicable? Greenblatt advocates simple, easy-to-follow rules that can keep investors out of trouble.
"Don't Buy More Stocks; Put Money in the Bank"
"1. After purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and
2. Overall market risk will not be eliminated merely by adding more stocks to your portfolio."
Greenblatt favors concentration; overly diversifying does not make a portfolio any safer and it relegates its performance to mediocrity. The key is to have enough diversification and avoiding excessive leverage such that one can avoid ever being forced to sell. After that has been achieved, simply hold enough cash. Have enough of a long-term orientation so that one can weather the inevitable downturn.
"Do Your Own Work"
Somewhere around 90% of publications about investing discuss factors that are already priced into the market price. That figure is probably closer to 99% when discussing liquid, famous companies. So, if you are interested in studying that which is not already priced in, you are stuck with yourself, your ideas, and your own analysis.
"Don't Trust Anyone Over Thirty" and also "Don't Trust Anyone Thirty or Under"
Essentially, advantage players don't give away their ideas (okay so I do, but I have invested in them first). If someone is trying to pitch an investment idea, it is exceedingly unlikely to be advantageous. Advantage players, in some form or another, are almost always investing in their own portfolio. The best that one can hope for is to either be such an investor or to invest in a partnership arrangement alongside one.
"Pick Your Spots"
Greenblatt's best investment ideas have been very, very good. However, his long-term performance record does not just rely on superior ideas. The key is that he has superior ideas and that he does not dilute his best ideas with lousy ones. He knows where he has an edge and he does not stray far from where he had an advantage.
"Look Down, Not Up"
Greenblatt tosses out the notion that one should measure risk by measuring historical volatility. Instead, he focuses on counting how much a given investment might lose. His cushion between what he counts as the value and what he pays when he underpays for a security is the "margin of safety".
"There's More Than One Road to Investment Heaven"
Among the great investors with statistically significant audited track records, there are various strategies and emphases represented. However, with few exceptions, they all practice various flavors of value investing. While his many adherents have altered and expanded upon Benjamin Graham's ideas, most of the investing greats have their intellectual roots firmly planted in his books.
Fund manager Joel Greenblatt has been beating the Dow (with returns of 50 percent a year) for more than a decade. And now, in this highly accessible guide, he's going to show you how to do it, too. You're about to discover investment opportunities that portfolio managers, business-school professors, and top investment experts regularly miss -- uncharted areas where the individual investor has a huge advantage over the Wall Street wizards. Here is your personal treasure map to special situations in which big profits are possible, including:
* Spin-offs * Restructurings * Merger Securities
* Mergers * Rights Offerings * Recapitalizations
* Bankruptcies * Risk Arbitrage
This is a practical and easy-to-use investment reference, filled with case studies, important background information, and all the tools you'll need. All it takes is a little extra time and effort -- and you can be a stock market genius.
Greenblatt's current investment company is responsible for the Formula Investing U.S. Value Select Fund, which we recently profiled as our favorite fund for killing spiders: better options than the S&P 500.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.