You Can Be a Stock Market Genius - Joel Greenblatt
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My recommendation: 9/10
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Summary of notes and ideas
“Statistics say that owning just two stocks eliminates 46 percent of the nonmarket risk of owning just one stock. This type of risk is supposedly reduced by 72 percent with a four-stock portfolio, by 81 percent with eight stocks, 93 percent with 16 stocks, 96 percent with 32 stocks, and 99 percent with 500 stocks. Without quibbling over the accuracy of these particular statistics, two things should be remembered:
- After purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and
- Overall market risk will not be eliminated merely by adding more stocks to your portfolio.”
“That doesn’t mean their knowledge of art and antiques doesn’t help them to make money, but many people can acquire that same knowledge. Their edge comes from taking this knowledge and applying it in places off the beaten path. While these places are tougher to find, once found, less competition from other informed collectors creates an opportunity for them to find “inefficiently” priced bargains. Finding bargain stocks works much the same way. If you spend your energies looking for and analyzing situations not closely followed by other informed investors, your chance of finding bargains greatly increases. The trick is locating those opportunities.”
“The strategy of putting all your eggs in one basket and watching that basket is less risky than you might think. If you assume, based on past history, that the average annual return from investing in the stock market is approximately 10 percent, statistics say the chance of any year’s return falling between -8 percent and +28 percent are about two out of three. In statistical talk, the standard deviation around the market average of 10 percent in any one year is approximately 18 percent. Obviously, there is still a one-out-of-three chance of falling outside this incredibly wide thirty-six-point range (-8 percent to +28 percent). These statistics hold for portfolios containing 50 or 500 different securities (in other words, the type of portfolios held by most stock mutual funds).”
“Over the long term (and this could mean twenty or thirty years long), stocks, despite the annual variability in returns, are probably the most attractive investment vehicle. Therefore, owning a widely diversified portfolio of stocks should enable you more or less to mirror the performance of the popular market averages. In the case of stocks, doing average ain’t all that bad.”
“The penalty you pay for having a focused portfolio—a slight increase in potential annual volatility-should be far outweighed by your increased long-term returns.”
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