In his 1997 book, You Too Can Be a Stock Market Genius, Joel Greenblatt made one thing perfectly clear: "The facts are overwhelming; stocks of spin-off companies significantly and consistently outperform the market averages." In 1985, he founded Gotham Capital with $7m and over the next 21 years compounded money at an annualised rate of 40%. Investing in spin-offs played a big part in that success. In his book he cited a Penn State study in which spin-offs outperformed the S&P 500 from 1964 to 1988 by an annualised 10%. In 2017, Mohnish Pabrai and Jaya Bharath Velicherla at Pabrai Investment Funds decided to backtest a portfolio of spin-offs to see if that still applied. The result: "On average the portfolio beat the S&P 500 by 7.9% annualised. If one had invested $100,000 in our spin-offs in 2000 and rebalanced every year since then, it would have turned into over $898,000 so far in 2017 versus $246,800 for the S&P 500." The reason might be simple enough. A spin-off takes place whe...
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