As always, remember the caveats.
Last weekend, I read my way through Joseph Greenblatt's now famous investing book, "You Can Be A Stock Market Genius." In all honesty, I started with this reference because it was cited as an influence by no less than two of the three fabulously successful (if somewhat idiosyncratic) hedge funds profiled in Michael Lewis' chronicle of the financial crisis, "The Big Short." It would be hard to interpret Lewis' book as implying that reading Greenblatt was the secret of their success, but if they thought it was good, I figure it's worth a look.
The book, despite it's doofy title, and despite now being a little bit dated, is still an excellent read. I won't go into the details of his "special situations investing" advice; after all, if I did, what reason would you have to read the book? Nevertheless, perhaps the most important lesson to be drawn from the book is this: it is in fact possible for an intelligent, motivated personal investor with only a small amount of capital to make better than average money in the stock market. This, of course, is very counter-intuitive; if there are people far more highly trained than I, with far more experience, who were specifically hired and are specifically paid to invest in stocks (and there are), and if they drive the overall behavior of the market and the stocks within it (and they do), then how can I hope to make any money, if making money requires exploiting an inefficiency that they have ignored? His argument - an argument that I think, to some degree, still holds - is that those professional investors are not trying to make money in the same way as I am.
There is, after all, a difference between investing hundreds of millions of dollars and investing tens of thousands. A large, institutional investor can hardly invest a significant amount of his or her portfolio in a company with a market capitalization of only $500 million. Most professional investors are investing someone else's money; the only way to earn a living doing that is to invest a lot of someone else's money, and so most professional investors will deliberately avoid or altogether ignore certain types of investment opportunities, especially small ones. Nevertheless, such small opportunities may offer more than enough reward for a small, amateur investor like myself. So, in brief, there's hope for me yet.
Of course, the development of the internet since the mid-nineties when Greenblatt published his book has both increased the number of small-time personal investors and the availability of stock information about even the most micro-cap of companies. This has, undoubtedly, ironed out or at least reduced many of the market inefficiencies that Greenblatt championed. But the important point remains: a small, personal investor like myself is not competing with the big-time Wall Street professional investors. So the market is not quite as hopelessly closed off to success as it might initially seem. Which leads somewhat clumsily to ...
