1. 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
2. Overall market risk will not be eliminated merely by adding more stocks to your portfolio.
[buying antiques and arts]
they ask themselves only question before buying. Are there comparable pieces of furniture or paintings that have recently sold at auction (or to dealers) at prices far above the potential purchase price?…
whether the in-laws can or cannot predict the future is beside the point; they don’t have to – they already know how to profit from studying the present.
[smaller companies more likely undervalued]
It doesn’t pay for Wall Street analysts to cover stocks or investment situations unless they can generate enough revenue (read commissions or future investment-banking fees) to make the time and effort involved worthwhile. Therefore, smaller capitalisation stocks whose shares don’t trade in large volumes, obscure securities, and unique situations are generally ignored. Ironically, the very areas that are uneconomic for large firms to explore are precisely the ones that hold the most potential profit for you.
[strict criteria, how strict?]
if your goal is to do significantly better than average, then picking your spot, swinging at one of twenty pitches, sticking to net serves, or any other metaphor that brings the point home for you, is the way to go. The fact that this highly selective process may leave you with only a handful of positions that fit your strict criteria shouldn’t be a problem.
[typical Graham’s methods]
Recent studies (e.g., Loakonishok, Schleifer and Vishny, Journal of Finance, Dec. 1994) continue to support his thesis that simply buying stocks that trade at low prices relative to their book values and earnings provides superior long-term results.
[Your Sweet Spots]
At most, since picking your spots is one of the keys to your success, following the basic principles of these investment greats should keep you focused in the right places.
Stocks of spinoff companies, and even shares of the parent companies that do the spinning off, significantly and consistently outperform the market averages.
In the Penn State study, the largest stock gains for spinoff companies took place not in the first year after the spinoff but in the second. [market realises; shareholder-focused]
[at your own pace]
the financial markets have also been known to accommodate those who prefer instant gratification. On the other hand, having the time to think and do research at your own pace and convenience without worrying about the latest in communication technologies has obvious advantages for the average nonprofessional investor. Besides, once you’ve spent a year prospecting in The Wall Street Journal (or in countless other business publications) for interesting spinoff opportunities, there should, at any given time, be at least one or two previously announced and now imminent SPINOFFS repe for further research and possible investment.
[Briggs spinoff strattec, 12% share to be incentives]
It may seem generous to an outside observer, as far as I am concerned the most generous a Board is with its compensation plan, the better— as long as this generosity takes the form of stock option or restricted stock plans. Read proxy, form 10. Focus your efforts selectively. Don’t have to read through page by page.
[about exercise price of managements option/rights]
it is to management’s benefit to promote interest in the spinoff’s stock after this price is set by the market, not before.
[insiders are the key]
Always check out the motives of insiders
no matter how a transaction is structured, if you can figure out what’s in it for the insiders, you will have discovered one of the most important keys to selecting the best spinoff opportunities.
When oversubscription privileges are involved, the less publicised the rights offering (and the lower the trading price of the rights), the less likely it is for rights holders to purchase stock in the rights offering, and the better the opportunity for insiders and enterprising investors to pick up spinoff shares at a bargain price.
We picked 2m shares [small amount, causing higher price per share] because we wanted Liberty stock to appear unattractive to TCI shareholders.
One press report summed up the general consensus nicely:” Liberty’s problems include an illiquid stock, a terribly complicated asset and capital structure, and lack of initial cash flow from its investments.” [haveing very limited appeal for most fund managers]
P.S. Less than a year after the rights offering, Liberty split its stock – twenty for one – the greater liquidity attracting both institutional investors and analysts.
SINOFFS: A QUICK SUMMARY
1. Spinoffs, in general, beat the market.
2. Picking your spots, within the spinoff universe, can result in even better results than the average spinoff.
3. Certain characteristics point to an exceptional spinoff opportunity:
a. Institutions don’t want the spinoff (and not because of the investment merits).
b. Insiders wan the spinoff.
c. A previously hidden investment opportunity is uncovered by the spinoff transaction (e.g., a cheap stock, a great business, a leveraged risk/reward situation).
4. You can locate and analyse new spinoff prospects by reading the business press and following up the SEC fillings.
5. Paying attention to “parents” can pay off handsomely.
6. Partial spinoffs and rights offerings create unique investment opportunities. [?]
7. Oh, yes. Keep an eye on the insiders. (Did I already mention that?)
1. Reruns of Gilligan’s Island are boring.
2. “Stealing” can be a good thing.
3. Don’t ask stupid questions at Lutece.
[Risk arbitrage] don’t try at home. Yogi Berra “It ain’t over till it’s over.”
Not unlike the dynamics of a spinoff situation, the indiscriminate selling of merger securities, more often than not, creates a huge buying opportunity. Both spinoffs and merger securities are distributed to investors who were originally investing in something entirely different. Both are usually sold without regard to the investment merits.
compared to the over $25 worth of cash being paid out in the deal, the preferred would account for only a small part of the value received by Super Rite shareholders in the buyout. This would provide a further incentive for Super Rite shareholders to simply disregard the investment merits of the preferred stock.
keep in mind, investing in the securities of a leverage buyout is generally risky business. However, it’s not often that individuals have the opportunity to invest alongside management and big-time financiers. It’s even more rare to be able to do so through securities that are publicly traded and available at discount prices.
My big advantage and what I knew was this: it pays to check out merger securities! [知道就是优势]
A study found that stocks of companies emerging from bankruptcy significantly outperformed the market. Much of the outperformance came from the stocks with the lowest market values. It may, therefore, be difficult for large investors to duplicate these results. … Wall Street generally ignores the stocks of companies coming out of bankruptcy. No one has a vested interest in promoting them: no commissions; no research reports; no road show. That’s why there stocks are sometimes called orphan equities. [no one wants means undervalue]
A good place to start is the category of companies that went bankrupt because they were overleveraged due to a takeover or leveraged buyout. Maybe the operating performance of a good business suffered due to a short term problem and the company was too leveraged to stay out of bankruptcy. … Sometimes companies that have made large acquisitions end up in bankruptcy simply because they wildly overpaid to acquire a “trophy” property.
The hundredfold rise of the stock of Toys R Us, the surviving business that emerged from the bankruptcy of Interstate Department Stores, is the best known example of what can happen to an orphan stock that is created through this strategy.
Trade the bad, invest in the good.
The bad news is that selling actually makes buying look easy- buying when it’s relatively cheap, buying when there’s limited downside, buying when it’s undiscovered, buying when insiders are incentivised, buying when you have an edge, buying when on one else wants it- buying kind of makes sense. But selling- that’s a tough one. When do you sell? The short answer is- I don’t know. I do however, have a few tips.
Under normal circumstances, I don’t have the ability to spot a good business that also happens to be greatly underpriced. Warren Buffett can, but few others are in his league.
Hey, call me chicken, but I had to sell. Greenman had become a hot stock. I wasn’t getting anything for free anymore- and besides, what the heck did I know about high flyers? Plenty could still go wrong. It was going to take a lot more twenty Noodle Kidoodle stores before Greenman would become profitable.
A QUICK SUMMARY
1. Bankruptcy – some points to remember
a. Bankruptcies can create unique investment opportunities – but be choosy.
b. As a general rule, don’t buy the common stock of a bankrupt company.
c. The bonds, bank debt, and trade claims of bankrupt companies can make attractive investments- but first – quit your day job.
d. Searching among the newly issued stocks of companies emerging from bankruptcy can be worthwhile; just like spinoffs and merger securities, bargains are often created by anxious sellers who never wanted the stuff in the first place.
e. Unless the price is irresistible, invest in companies with attractive businesses- or as Damon Runyon put it “It may be that the race is not always to be the swift Notre the battle to the strong – but that is the way to bet.”
2. Selling Tips
a. Trade the bad ones; invest in the good ones.
b. Remember that hypotenuse thing from the last chapter – it won’t tell you when to sell, but at least I’m sure it’s right.
a. Tremendous values can be uncovered through corporate restructurings.
b. Look for situations that have limited downside, and attractive business to restructure around, and a well-incentivised management team.
c.in potential restructuring situations, also look for a catalyst to set things in motion.
d. Make sure the magnitude of the restructuring is significant relative to the size of the total company.
e. Listen to your spouse. (Following this advice won’t guarantee capital gains, but the dividends are a sure thing.)
There is a tax advantage to having a leveraged balance sheet.
Maybe I wasn’t enamoured with the quality of FMC’s businesses and just followed my own advice by “trading the bad ones”(or maybe I got up on the wrong side of bed the day I decided to sell). Regardless, I was kind of glad to miss out on that kind of “fun.” [up and down a lot]
owning a call isn’t too much different from owning a stub stock. With a stub stock, you have a leveraged bet on the future of a company, and you can only lose the amount invested in the stub. In our regional exampl, where the company with a $36 stock recapitalised by distributing $30 to its shareholders, the result was a leveraged stub that magnified changes in the value of the underlying company. There, a relatively modest 20% increase in earnings resulted, in one scenario, in an 80% gain in the stub stock’s price. … Stub stocks are common stocks so in some sense, they are really like calls without an expiration date (although the stub stock may become worthless as a result of bankruptcy proceeding). It is this unlimited life that makes stub stocks so attractive.
a bank is a funny animal. You never really know exactly what makes up its loan portfolio. The financial statements only give a very general overview of the bank’s assets. Then again, Wells did offer some comfort in this area.
there is buying press on the shares of the parent company of the spinoffs transaction; selling pressure for the acquirer due to closure of arbitragers.
A QUICK SUMMARY
1. Stub Stocks. There is almost no other area of the stock market where research and careful analysis can be rewarded as quickly and as generously.
2. LEAPS. there is almost no other area of the stock market (exception of stub stocks)where
3. Warrants and special Situation Option Investing. There is almost no … (Exception of stub stocks and Leaps)