Interview with Joel Greenblatt
Q: Where do you find "the secret hiding places" of stock market profits described in your book?
A: You don't have to look under Love Canal or get shot down spying over some secret Russian miliary base to find them, but the truth is stock market profits can be hiding anywhere-and their hiding places are always changing. In fact, the underlying theme to all of the investment opportunities described in my book is change. Something out of the ordinary course of business is taking place that creates an investment opportunity. The list of corporate events that can result in big profits runs the gamut-spinoffs, mergers, restructurings, right offerings, bankruptcies and more. If the indiviual sticks to looking for investment opportunities in these "secret hiding places" he or she has a huge advantage over the investment pros- and everyone else-just going in. This may sound pretty complicated, but once you learn what to look for in the daily paper, it becomes pretty obvious.
Q: How did you discover them?
A: It wasn't a calculated plan. I just decided to look for opportunities in places that everyone else appeared to be ignoring. For instance, in the case of spinoffs, shareholders of a parent company are distributed shares in a subsidiary or division they never asked for. So they simply sell them. I look at these situations because time and time again this system of distributing shares to investors who don't want them creates wonderful buying opportunities. Studies have shown that just by investing in spinoffs investors can double the return of the market averages. And if you learn to pick your spots in an area like spinoffs you can do even better.
Q: Why haven't others found out about them?
A: It's really just the way the system works. Analysts aren't set up to follow companies undergoing extraordinary change. They're really fixed on analyzing companies of a certain size within their own industry group. Anything that falls out of this narrow focus falls by the wayside. Most institutions can't be bothered to follow these situations either. They aren't being sold or promoted by the investment firms and they may be too small or too out of the way or just too weird for them to bother with.
Q: Will an English major with no financial background be able to understand the investment strategies and financial concepts in your book?
A: Almost anyone with an interest in putting in a little time and effort can understand and use the concepts. Almost anyone can understand the basic investments and why they work and should continue to work. In the book I discuss a few places where people who need to brush up on the basics of balance sheets and income statements can pick this stuff up pretty painlessly.
Q: So even a novice can make a fortune by using your investment strategies?
A: Yes. The idea behind my book is to send people to areas where they are ahead of the game even before they start. So, in many of the investment areas dicussed in the book, investors can pretty much bungle their way into some nice profits. I don't beleive that just giving someone a stock tip is that helpful-but if, like the cliche says, I can "teach them to fish"-then what I've really done is to help them over a lifetime.
Q: Why are special corporate events such as spinoffs, restructurings, mergers or even bankruptcies potential gold mines for investors?
A: These corporate events are excellent investment opportunities mostly because they are all involve a fundamentally inefficient system for distributing securities to the wrong people. Stocks of spinoffs, or securities issued in a merger, or stocks of companies coming out of bankruptcy are depressed because they are issued to people who don't want them. Initial selling pressure usually results in a low price, creating bargin opportunities. And since these opportunites are created by special corporate events-events that take place in all market enviroments-new bargains are constantly being created.
Q: You don't seem to hold brokerage firms in very high regard. Is the advice they give bad?
A: I have two rules that cover my advice for investors when they get a call from a stockbroker. The first is don't trust anyone over 30. The second is don't trust anyone 30 or under. Frankly, the odds of anyone calling you on the phone with good investment advice are about the same as winning Lotto- without buying a ticket. Seriously, the record of research analysts at major brokerage firms for predicting future earnings of stock prices is quite poor. And if you believe the record of smaller brokerage firms who tout penny stocks is any better, you're not someone I can help. Even institutional clients of reputable investment firms don't get particularly good advice.
Q: Why is this?
A: The reasons for this consistenly poor showing are largely systematic in nature. The vast majority of analysts are not directly paid by clients, and the research recommmendations and reports they produce are peddled by the firm's stockbrokers in exchange for commission business. Because it's much easier to generate comissions from new "Buy" recommendations than from recommendations sometimes the analyst's firm is vying for investment banking business, so a bad report from the analyst may hurt the firm's chances of attracting or keeping a client. Additionally, most analysts know little about the comparative merits of stocks in other industries. A neighborhood in Cleveland may look great next to one three blocks over, but not when compared to Beverly Hills.
Q: How is it that the pros overlook the special investment situations described in your book?
A: There are many reasons why huge profit opportunites-particularly the ones described in the book- aren't generally available from brokerage firms. First, these special opportunities often fall outside an analyst's specific area of expertise. Many analysts actually suspend rating or drop investment firms and their analysts to cover stocks or investment situations unless they can generate enough revenue-through commissions and investment banking fees-to make the time and effort worthwhile. Therefore, smaller capitalization stocks whose shares don't trade in large volumes, obscure securities, and unique situations are generally ignored. Ironically, the very areas that are uneconomic for large firms to explore are precisely the ones that hold the most potential profit for individual investors.
Q: Which of the investment areas described in your book are the easiest to take advantage of?
A: For most people, I'd have to say the spinoff area. Pretty much everyone can play the spinoff game. Spinoffs are easy to spot. You can pick and choose from a large number of opportunities, and the group as a whole beats the pants off the market. In fact, you can spend your whole life just in the spinoff area. Of course, eventually no one will talk to you and pretty soon the drool dripping off your chin will start to bug you-but there's really no need to look anywhere else.
Q: Which are the most difficult? Are there any areas novice investors should avoid?
Q: None are particularly difficult, but there are a few areas, like LEAPS (long term options) and special situation options, where everyone, especially those just getting started with options, should use more than the usual amount of caution. While investing even a small portion of your assets in these highly leveraged instruments can lead to a spectacular increase in the value of your portfolio options carry a particularly high degree of risk. Investing in this area without a good understanding of how options work is like running through a dynamite factory with a burning match-you might live, but you're still an idiot.
Q: Give that each week there are dozens of special corporate events that have enormous potential for profits, how does one decide which of them to follow?
A: You can't follow all of these situations, and you don't have to. Even finding one good opportunity every month or two is far more than any investor should need or want. Just reading the paper eve
--This text refers to an out of print or unavailable edition of this title.