November 22, 2024 • 1hr 17min

TIP677: You Can Be a Stock Market Genius w/ Roger Fan

We Study Billionaires - The Investor’s Podcast Network

In this episode, Clay Finck interviews Roger Fan, CIO of RF Capital Management, to discuss Joel Greenblatt's book "You Can Be a Stock Market Genius." They explore Greenblatt's special situations investment approach, analyzing specific case studies and discussing how these strategies can be applied by investors today.

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Key Takeaways

Joel Greenblatt's Track Record: Averaged 40% annual returns over 20 years at Gotham Capital (30% net of fees) without using leverage
Special Situations Focus: Greenblatt concentrated 80% of his portfolio in 5-8 special situation investments
Three Key Characteristics for evaluating spinoff opportunities:
- Institutions don't want it (forced selling creates opportunities)
- Insiders want it (management incentives aligned)
- Hidden investment opportunity is revealed
Post-Bankruptcy Opportunities: Focus on companies emerging from bankruptcy rather than trying to invest during bankruptcy proceedings
Concentration Strategy: 5-10 core holdings making up 80% of portfolio, with position sizes ranging from 5-20% based on conviction

Introduction

In this episode, Clay Finck interviews Roger Fan, CIO of RF Capital Management, to discuss Joel Greenblatt's book "You Can Be a Stock Market Genius." They explore Greenblatt's special situations investment approach, analyzing specific case studies and discussing how these strategies can be applied by investors today.

Topics Discussed

Joel Greenblatt's Background and Accomplishments (02:22)

Roger Fan outlines why Greenblatt is considered one of the greatest investors:

Phenomenal Track Record: 50% returns in first decade, 30% in second decade at Gotham Capital
Excellent Writer: Author of clear, practical investment books
Great Teacher: Known for explaining complex concepts simply at Columbia
Successful Mentor: Backed successful managers like Michael Burry
Philanthropist: Significant work in education and charter schools

Special Situations Overview (06:22)

Discussion of why special situations create investment opportunities:

Market Inefficiencies: Special situations naturally lead to mispricings
Forced Selling: Institutions often must sell for non-economic reasons
Small Cap Focus: Most opportunities in companies under $1 billion market cap
Portfolio Allocation: Greenblatt allocated 80% to special situations

Spinoffs Deep Dive (10:47)

Analysis of why spinoffs can create attractive investment opportunities:

Market Outperformance: Spinoffs historically outperformed by 10% annually in first three years
Parent Company Returns: Parent companies outperformed by 6% annually
Ongoing Opportunity: Same market dynamics continue to create opportunities today
Investor Psychology: Institutional constraints and retail investor behavior create mispricings

Host Marriott Case Study (19:04)

Detailed examination of Greenblatt's investment in Host Marriott spinoff:

Background: Separation of hotel management (good business) from property ownership (bad business)
Key Characteristics: Met all three criteria for attractive spinoff
Insider Alignment: Management and Marriott family maintained significant ownership
Leverage Impact: Small changes in asset values could create large stock price moves

Risk Arbitrage Discussion (33:50)

Analysis of risk arbitrage opportunities and challenges:

Definition: Betting on completion of announced deals
Risk/Reward: Often modest returns but potential for significant losses
Recent Example: Buffett's Activision arbitrage trade netted 20% gain
Modern Challenges: Increased competition has reduced spreads

Kmart Case Study (58:50)

Detailed analysis of Eddie Lampert's successful Kmart restructuring:

Background: Filed bankruptcy in 2002 after facing competition from Walmart/Target
Strategy: Lampert accumulated $2.3 billion in various claims
Asset Mispricing: Real estate portfolio severely undervalued
Outcome: Stock rose from $15 to $109 in 18 months post-bankruptcy

Portfolio Management Approach (1:11:03)

Roger Fan discusses his implementation of Greenblatt's principles:

Core Holdings: 5-10 positions make up 80% of portfolio
Position Sizing:
- 5% minimum starter position
- 10% baseline position
- 15-20% for high conviction ideas
- Maximum 20-25% position size at cost
Smaller Positions: Reserved for special situations, options, shorts

Conclusion

The episode provides valuable insights into Joel Greenblatt's special situations investment approach and how it can be applied today. Key lessons include the importance of: