Notes: You Can Be A Stock Market Genius

 Little opportunity to outperform at higher market capitalizations

 6-8 stocks across different industries eliminates nearly all non-market risk
 Market risk is not eliminated by adding more securities
 Spend your energies looking for and analyzing situations not closely followed by other well-informed
investors
 Investing basics:
 Do your own homework (required if looking at situations others aren’t following)
 You’re in a better position to gauge appropriate payoff given risks
 Payoff is opportunity to invest in situations that offer unfair economic rewards
 Don’t trust any other investment advice; it’s typically not very good
 Analyst incentives don’t align with investors
 Unique situations typically are uneconomic for large firms / analysts to cover
 Over the long-term (20-30 years) stocks are your best investment; 10% average annual return
 Extraordinary returns come from concentration of positions
 Don’t buy more stocks, put money in the bank
 A specific risk when viewed in isolation may appear unsafe/foolish, in context of entire portfolio (e.g.
cash, real estate, bonds, etc) they work
 Asset class diversification will help with stock market swings
 Look down, not up
 Inefficiently priced situations risk/reward relationship doesn’t necessarily apply
 Risk calculations and interpretation academically are typically “wrong”
 Comparing the risk of loss to potential gain is what investing is all about
 Such an imprecise and difficult task a proxy of your own is in order
 Limit downside by looking at situations with a “margin of safety”
 There’s more than one road to investment heaven
 Treat market as “Mr. Market”; ignore fluctuations wait for extreme price opportunities to buy/sell
 Buffett added to Graham by investing in fundamentally good business as opposed to just “cheap”
 Can increase returns due to future value-add of quality/good businesses
 Various strategies can outperform the market; Lynch, Beardstown Ladies (Value Line)
 The secret hiding places of stock-market profits
 Can be hiding anywhere; underlying theme is change
 Special situations:
 spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales,
distributions provide very good opportunities
  Use your own experiences and intuition in every investment you make
 Window of opportunity immediately before/after the event
 Can trigger short-term gains; best if done in tax-sheltered accouts
 Special situations; pretty much everything on the menu is going to be good, choosing the right restaurant
is the most important part
 You not only have to look for investments in places other investors don’t; you have to look in the right
places
 Spinoffs:
 Facts are overwhelming; spun-off companies and parent companies that continually spinoff others
outperform
 Likely will continue to outperform
 Unrelated businesses that can be better appreciated on their own
 Motivation may be to get rid of a “bad” business that is distracting management so that the “good”
business(es) can show through to investors
 Easy way to give value to shareholders for a business that can’t be easily sold
 Tax considerations can influence spinoff vs. sell decision
 May solve a strategic, anti-trust, or regulatory issue making way for other transactions/objectives
 The spinoff process is fundamentally inefficient method of distributing stock to the wrong people
 Investors in parent typically don’t want spinoff business; sold without regard to price
 Usually much smaller than parent company; institutional investment policies require sale
 Managements are freed from parent, unleash entrepreneurial spirit, better incentives
 One important study, outperformance occurred in year 2, after selling pressure
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