By Joel Greenblatt
|Original Publication Date||1999|
|Similar Titles||See author's other works|
|Works from Same Author||Yes|
The central theme of this book is that outsized returns are to be found in areas where others, particularly professionals, can’t or won’t participate. Greenblatt examines the backwaters of Wall St. and offers some keen insight into where and why opportunities may be found.
The topics covered in this book are pretty niche in nature and my sense is that this book isn’t for everybody. This book (imo) is best suited to the sophisticated individual investors or the unconstrained professional given that special situations demand/require some keenness about the financial world – few novices will even know what a subordinated callable debenture is, let alone be able to determine if it’s fairly priced! Greenblatt clearly has a knack for explaining things and all of the case studies in this book are excellent. I suspect though, that novice readers might have a hard time generalizing these concepts to other opportunities because special situations are, by their nature, all unique. This is by no means a criticism of the book – I enjoyed it – but I’m not really sure who the intended audience is.
Some examples of the kinds of things that are found within:
- Spin-offs: Greenblatt lists a myriad of reasons why investors are unlikely to hang on to securities that have been spun-out of larger businesses It’s too small, it’s toxic waste, it’s got nothing to do with their investment thesis, they don’t want to take the time to understand it, it’s not what they originally bought, and so on… Any of these reasons could be viewed as “rational” through the lens of the seller (e.g. an index fund can’t own the spun-out securities if they’re not in the index, and thus they must sell!) but while rational, they’re often made without consideration of the actual economic merits of the investment itself. Any circumstance where you have large numbers of participants making non-economic decisions, opportunities may exist. Another interesting distinction he makes about about spin-outs vs. IPOs: whereas the latter essentially requires an “opt-in”, such that everybody who ends up owning the IPO’d shares presumably wanted to own them enough to actively participate in the IPO process, spin-outs are generally forced on investors.
- Mergers: Interestingly he strongly advises against merger-arb which I feel is justified based on the return profile alone (small upside, large downside). His focus here is the relatively rare “merger security” space. Sometimes (thought rarely) a merger will result in the issuance of unusual securities (debentures, warrants etc). Given the uncommon nature of these securities, he claims that the market often doesn’t know (or care) what to do with them and thus there’s value to be found!
- Restructurings: According to Greenblatt, companies that choose to restructure tend to have a stronger shareholder focus than those that do not. The latter tends to continue running themselves into the ground. His advice here is the basically the same as for spin-offs and mergers – look for unusual securities generated by restructurings, understand where management incentives lie, position accordingly.
- Bankruptcies: Stay away from the common shares in a bankruptcy as holders typically wind up getting nothing, but pay attention to bonds, debentures, bank debt etc. Sometimes there are bargains to be had because bankruptcy is a scary word and fear causes many otherwise rational investors to do irrational things sometimes.
- You get the idea… Pay attention any time something unusual happens to a stock.
Greenblatt cites broad-based research to support most of the above ideas when describing their basic mechanics. He then spends most of his time exploring case studies and specific examples.
It’s worth noting that this book is now over 20 years old and some of the specifics may thus be out of date, which is fine. The value in this book is in the principle, not the specifics. Look for opportunity in the places others neglect, forego or are otherwise reluctant (or unable) to participate – this game is hard enough, why complicate it further by trying to compete in crowded spaces?
If you’re looking for case studies on special situations, this book is for you. If you’re not interested in the weird stuff (and most aren’t, but definition) then you can safely give this one a pass. Great book, but not for everybody.