Investiv Daily Has Arrived

[Hunting For Bargains? Look For These Special Situations]( By Sven Carlin on May 17, 2017 - Apart from finding bargain investments, understanding the catalysts that will unlock value is even more important. - Complex securities, risk arbitrage, liquidations, and spinoffs are bargain hunting territory for the value investor. Introduction Today, we’ll look at Chapter 10 of Seth Klarman’s seminal work on value investing, Margin of Safety. Chapter 10 digs deeper into value investing and discusses complex situations. We would all love to just run a screen, find a few cheap stocks to buy, and then wait a year or two to enjoy triple digit returns. However, as the book value of the S&P 500 is just a third of its market value, value investors are in a difficult position and therefore are forced to look for bargains in all kinds of places, dig deeper, and comprehend complex situations. Unfortunately, if a value investment is simple to analyze, it’s also an obvious thing for other investors which limits the discount and potential returns. This leads value investors to do research into areas such as corporate liquidations, complex securities, risk arbitrage, and spinoffs. Catalysts An investor isn’t done when they find a bargain. What’s very important after you’ve found a bargain is to understand what catalysts are going to unlock its value. Finding a bargain that has some triggers that are going to unlock the value separates the investment’s reliance on market forces, speeds up the unlocking of value, and increases the margin of safety. Examples of catalysts are an imminent liquidation of the business, a change in voting control, spinoffs, share buybacks, recapitalizations, and asset sales. Catalysts allow for the realization of profits, which is the most important factor in investing. They also reduce risk because if the discrepancy between the underlying value and the market value is closed quickly, the chances for new aggravating market or business circumstances are minimal. Corporate Liquidations We’re all attracted by businesses with growing revenues, earnings, and dividends. The problem is that such businesses are usually fairly valued if not even overvalued. On the other hand, a business going into liquidation is usually a very complicated situation, with many uncertain outcomes ranging from labor settlement costs to asset sale prices or tax implications. The complexity of such situations makes investors prefer ongoing businesses, but this is exactly why liquidations are a great place to look for bargains. In this market liquidations will be rare, but as soon as a recession hits the economy there could be many bankruptcies and liquidation sales because lots of businesses have been kept alive artificially by low interest rates on high-yield debt. Perhaps only one in twenty distressed companies will be a good investment, but finding such an investment is surely worth it as it’s a low risk high return investment. If there are any kind of catalysts attached to it, even better. Complex Securities In this chapter, Klarman discusses securities where the distributions are usually dependent on some contingent event. For example, in 1985, Bank of America issued preferred shares at a $25 par value where the payouts depended on the performance of a specific loan portfolio. The shares had a fixed dividend of five years but afterwards if the losses on the loan portfolio surpassed $500 million, Bank of America could retire the preferred shares at only $2 per share. Given the complexity of the situation, the preferred shares were trading at prices that were attractive even with the worst-case scenario materializing and shareholders getting only $2 per share. Such investments require deep insight, due diligence, and lots of research to find. Few investors have the time to search for such situations and therefore there is often mis-pricing. [Misunderstood Option Strategy Earns Novice Trader $41 Million In Only 3 Years]( Find out how you can use it to immediately generate substantial income when the market opens on Monday... even if you're starting with limited funds. It's safe, reliable, and can be duplicated over and over again to generate income you can use right now if you want. Or you can let it snowball into even more. [Click Here To Learn This Strategy]( "Artificial Intelligence" Is Crushing Buy And Hold Investing The compound annual returns generated by computer automated trading strategies have crushed buy and hold investing. One strategy, disclosed just ahead, has produced compound annual returns 56X greater than the S&P 500. Deploying this logic in your portfolio could be a retirement game changer. To see how you can put this Artificial Investing Intelligence to work in your portfolio [click here.]( Risk Arbitrage Risk arbitrage involves taking advantage of temporary market inefficiencies where the gain or loss depends on the completion of a business transaction, usually a merger or an acquisition. In today’s environment, this is typically related to acquisitions where the transactions necessitate significant regulatory approvals. However as investors, we have to look at risks and rewards. If an acquisition doesn’t go through, the risk is that the stock price of the target company returns to the pre-acquisition levels. While if the acquisition goes through, shareholders are rewarded with cash. You can read more about merger arbitrage [here](. What’s important from Klarman’s book is the description of the Risk-Arbitrage cycle. If merger or risk arbitrage becomes an attractive way of investing, the spreads are usually very small. This leads to fewer investors being attracted to the strategy which in time increases the benefits for those who do use risk or merger arbitrage. A clear example is the Bayer Monsanto acquisition. Bayer announced a $128 per share offer for Monsanto (NYSE: [MON]( in September 2016 while previously announcing lower bids. Despite the fact that the deal was expected to close in a year’s time, MON’s stock price fell to a price below $100. At such a low level, the risk of the deal not going through would mean a minimal decline in MON’s stock price while the upside represented a 30% return in addition to MON’s 2% dividend yield. It’s clear that merger arbitrage opportunities aren’t appreciated much in this market due to the complicated regulatory processes and the fact that everybody is buying index funds. This creates excellent opportunities for the patient value investor. Spinoffs Another interesting opportunity for investors in today’s market are spinoffs. As the new entity isn’t immediately included in an index, there isn’t much demand for such a stock, analysts are not incentivized to cover small stocks, and shareholders that got the new shares usually tend to sell the spinoff as they prefer to keep owning the mother company. In such a situation, the spinoff company can trade at an irrationally low price. Five of the most recent six spinoffs have been very profitable investments for those who acquired them on the first day of trading. Figure 1: [HGV]( [PK]( [VREX]( [LOGM]( [BIVV]( and [DXC]( are recent spinoffs. Source: [Nasdaq](. Conclusion Investing in the above described special situations requires patience and discipline. Patience to wait for the opportunities to arise, and discipline to do proper analysis on them. In this 8-year old bull market, investing seems easy as all you need to do is buy the S&P 500. However, investors following such a strategy have been burnt twice in the last two decades and have achieved meagre returns. Knowing that the average investor achieves much lower returns due to bad timing or funds availability, the situation is even worse. The above described options provide an excellent way to lower your risks and increase returns. The essence of Klarman’s investing style. Happy hunting! [No Comments »]( | Filed under: [Investing Strategy]( [Investiv Daily]( [Seth Klarman]( | Tags: No Tags --------------------------------------------------------------- If you are having trouble reading this email, you may [view the online version]( This email was sent to {EMAIL} by Investiv, LLC 3400 North Ashton Blvd. | Suite 170 | Lehi | UT | 84043 [Forward to a friend]( | [Unsubscribe]( Disclaimers Investing is Inherently Risky There are risks inherent in all investments, which may make such investments unsuitable for certain persons. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. You may lose all of your money trading and investing. Do NOT enter any trade without fully understanding the worst-case scenarios of that trade. And do NOT trade with money you cannot afford to lose. Past performance of an investment is not necessarily indicative of its future results. No assurance can be given that any implied recommendation will be profitable or will not be subject to losses. Hypothetical Results Are Reported Results and examples used in the Company’s advertisements, books, videos, websites, and other media—including on the Site and the Network—are, in some cases, based on hypothetical (simulated) trades. Plainly speaking, these trades were not actually executed. Hypothetical performance results have certain limitations. Unlike an actual performance record, hypothetical results do not represent actual trading. Also, since the trades have not been executed, the hypothetical results may have under-or-over compensation for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical trading programs generally are also subject to the fact that they are designed with the benefit of hindsight. Hypothetical results also do not account for commissions or slippage. The Company’s simulations assume purchase and sale prices believed to be attainable. Yet traders are going to be getting into trades at different times and using various exit approaches, which may result in different pricing and outcomes. You may or may not receive the best available price on the purchase or the sale of a position in actual trading. Information provided by the Company is not investment advice. The Company is not a registered investment adviser, stock broker, or brokerage. You agree that the Company does not represent, warrant, or take responsibility that any account will or is likely to achieve profit or losses similar to those shown. Examples published by the Company are selected for illustrative purposes only. They are not typical and do not represent the typical results of all stocks within the Company’s software or its individual scans and searches. No independent party has audited any hypothetical performance contained at this Web site, nor has any independent party undertaken to confirm that they reflect the trading method under the assumptions or conditions specified. Offers Disinterested Commentary and Analysis The Company does not receive any form of payment or other compensation for publishing information, news, research, or any other material concerning specific securities on the Network that is intended to affect or influence the value of securities. The Company, and its personnel, do not engage in front-running of recommendations and do not trade against one’s own recommendations. The Company and its management may benefit from an increase or decrease in the share prices of the profiled companies, and/or may have other actual or potential conflicts of interest. If a particular security featured in a newsletter publication is concurrently owned by the Company in its corporate brokerage account, or in any of the individual accounts of the Company’s principals or analysts / writers, that fact will be disclosed. The Company, its principals, analysts and writers may choose to purchase a security or derivative featured in one of its newsletter publications, but typically will wait three (3) trading days from the date of publication before initiating said purchase. [Disclaimers, Terms & Conditions]( | [Privacy Policy]( Copyright 2017