There are many kinds of investing you’ve heard of, like growth investing, value investing, dividend investing, and perhaps my favorite, buying a bunch of weed to resell to all the stoners on October 18th. I have a feeling the price is going to really skyrocket that day.
AWW GODDAMMIT GUYS.
These are all fairly standard investing styles that can easily be added to your portfolio via a selection of ETFs. There’s also the argument that if you buy ETFs that track large indexes then you’d automatically get exposure to every type of investment anyway. After all, indexes have all sorts of different stocks in them. Some will be value names, others will offer more growth. Many will pay dividends. And so on. This is pretty simple stuff, yet I felt the need to explain it for some reason.
Let’s talk about a method of investing that gets virtually zero attention, special situations investing.
What’s special situations investing, anyway?
Great question, giant header font. Special situations investing is a broad term for putting your money to work in any unique situation that promises the investor a potential profit when the event normalizes.
That’s a pretty broad explanation, so let me list a few examples. Special situations investing might include:
- Merger arbitrage (when there’s a small profit to be made because of the slight chance a corporate takeover doesn’t succeed)
- Spin-offs (when a company breaks into two or more parts, the new part will often outperform over the short-term)
- Odd-lot tenders
- And a few more that we won’t get into
Odd-lot tenders are definitely my favorite type of investing. Here’s what happens. A company will announce a share buyback that gives first dibs to odd lots. An odd lot is defined as anything less than even multiples of 100 shares. So investors buy 99 shares at the current market price, and then tender their shares at the offer price knowing they’re guaranteed to make a small profit.
These happen often enough that investors could make a decent return on small amounts of money (like, say, $10,000) if they paid attention to the space. I’m talking $1,000 a year, easy. Maybe odd-lot tenders could be the new credit card hacking.
Hedge funds tend to dominate the field of special situations investing. Whenever there’s an acquisition announced, a small army of these analysts scrutinize the smallest of details to determine a deal’s chances of succeeding. If these odds are greater than the spread between the deal price and the current market price, their cash gets put to work.
The beauty of these investments
I’m the first to admit there’s a fair amount of research that goes into special situations investing. You have to sift through the whole investing universe looking for these opportunities. Then, when you find them, you have to narrow down the field again, looking for ones with mispriced odds. A good special situations investor will only put his money to work in maybe half a dozen companies a year.
The benefit of doing all this is really important. By putting a portion of your cash in odd-lot tenders and other such situations, you create an investment that isn’t correlated at all to other stocks. If done right, special situations investing should be able to return steady results no matter what the underlying stock market does.
Bonds have traditionally played such a role in one’s portfolio. The problem with bonds is they do tend to do poorly when stocks do well and these days a 3% yield is all you’re getting in the bond world. That’s not enough to excite me. I CRAVE ADRENALINE, BABY.
(Promptly falls asleep on my recliner)
The bottom line
I may feature some of the special situations investments I do at some point here on the blog. I’ve looked at a few in the past, with varying results. Remember, special situations that don’t attract the attention of big investors tend to do best.
Most people reading this won’t dabble, which is quite okay. There needs to be a large level of commitment to the practice. It’s far easier to own a handful of index funds and call it a day.