A Brief Book Review of You Can Be a Stock Market Genius by Joel Greenblatt
In August 2012, I moved back to New York from San Francisco and set up a sole proprietorship, Mutoro Group, LLC. I began investing my own money full-time. It wasn’t much money. But it was mine, and it worked. For three years, I ate what I killed, so to speak, given I didn’t have any other earnings besides the income I generated through my investment ideas. I ate pretty well. I took an idea I had found in Joel Greenblatt’s poorly titled but quirky and incredible book You Can Be a Stock Market Genius (1997), which I had first read in July 2010, and applied it with success. He described several approaches for investment gains. One in particular caught my attention. He described how if you found publicly traded companies mispriced in the market and selling at a discount to their value, you should study the options on their shares. In particular, you should investigate their long-dated, out-of-the-money call options because these might be even more underpriced. That $1 you found selling for 70 cents might be selling for 25 cents if you acquired its long-dated options instead.
I went about applying a somewhat more involved version of this useful framework from Greenblatt’s book. I made multiples of my money on the computer manufacturer Dell, on the giant, beleaguered insurer AIG, and on the home security company ADT. I was compounding money at an attractive rate and increasing my net worth faster than it ever had grown. The biggest challenge I had was making sure I kept enough capital on the sidelines to cover my living expenses and taxes, while plowing more money into investments. I spent the bulk of my time reading and thinking. In the course of a year, I might unearth one or two ideas that I had high convictions about and then make a large allocation toward them. It was challenging, and not every idea worked; I took a loss on a Chinese textile company with corrupt management I had not vetted thoroughly enough, and I made a poorly reasoned investment into a leveraged natural gas driller before the energy industry bear-market. I learned important lessons on my own dime from these two misadventures. Even considering those losses, the whole operation was profitable and, in many ways, blissful.
Rereading You Can Be a Stock Market Genius this week felt like a refreshing reunion with an old, wise friend.