What is Special Situations Investing? (And Why Should You Do It?)

What is Special Situations Investing? (And Why Should You Do It?)

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.

(Checks news)


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.

Saturday Linkfest #30. Or #1. It’s Complicated

Saturday Linkfest #30. Or #1. It’s Complicated

Should we continue numbering these things where I left off back in 2017? Or should we start over? Or maybe I should get a new way of telling these bad boys apart since I can’t count past 48.

Before we get to the links, let me tell you kids about a contest over at the Lowest Rates website. They’re looking for the best piece of personal finance advice you’ve ever received. The best of the submissions will win a shiny new MacBook. That’s some serious swag right there.

I’m not really sure what the best piece of personal finance advice I’ve ever received. I remember my first boss at my very first job (Dairy Queen, REPRESENT!) used to tell me “take care of the pennies and the dollars will take care of themselves.” I also remember being taught the beauty of having your money work for you as you sleep around the same time. Both pieces of advice seem pretty simplistic now, but they really made a difference back then. It turns out 14-year old Nelson was pretty clueless. Some might argue 35-year old Nelson isn’t much better.

Now seems like a good time to remind y’all about the worst financial advice I ever received.

Alright, it’s time for some links. Let’s do this thang.

Links I liked

1. Let’s start things off with the nearest tab currently open on my laptop. No, it’s surprisingly not porn. It’s a series of networking tips from Tim Ferris, that guy everyone publicly says is annoying but actually they like his stuff. I am no different.

2. I’m a fan of these monthly investing ideas from Mr. Tako Escapes. If you like the way I invest, you’ll probably be interested in Mr. Tako’s takes.

3. Bruce Flatt runs Brookfield Asset Management, which might be the world’s largest asset manager. Okay, not quite, but the company is still a behemoth. It owns everything from real estate to power plants and everything in between. He recently gave a talk at Google about his investing philosophy and about 14 people showed up. Maybe everyone planned to watch it on Youtube after? I dunno.

4. About once a year, Freedom 35 Blog puts together a bunch of negative comments about his blog from various anonymous internet folk. They’re pretty funny. Nice to see he’s got a sense of humor about it all. I know other bloggers who would actually lose sleep over stuff not nearly as bad.

5. A nice post from Paul over at Asset-Based Life, talking about one of the reasons I’d say everyone blogs. We want to leave some sort of legacy. Paul wants a resource about money he can use to educate his kids. I’m firmly on Team No Kids, meaning my target market is bored tech employees doing anything they can to avoid real work. I feel your pain, brother.

6. I’ve been a fan of Dale Roberts’ writing over at Seeking Alpha for years now. His new site, Cut the Crap Investing, is dedicated to helping Canadian investors lower their investing fees while keeping their portfolios simple. Not surprisingly, he recommends a lot of ETFs. He recently came up with a bunch of model portfolios which are definitely worth a few minutes of your time.

7. The New Horizons Mall just outside of Calgary promised to be truly unique. Instead of vendors renting space, they would buy their own individual store. Think of it like a condo, but also a shopping mall. What started out as a great idea has stumbled. The mall has recently opened with a 98% vacancy rate. No, that’s not a typo. What a crazy place. I must visit.

8. Gen Y Money has some interesting thoughts on the ol’ FIRE movement, specifically why she wants a nice cushion before she retires and why many retirement bloggers have just transitioned from full-time work to blogging. Long-time readers might be interested to know I’m beginning to soften my thoughts on the definition of retirement, mostly because I just don’t care anymore.

9. Gonna sneak in a link to the ol’ investing blog here. I found an interesting company that’s buying up strip clubs. Nobody is surprised I wrote about this.

10. Here’s a fantastic discussion from actual small business owners about the new tariffs impacting goods traveling across the Canada-U.S. border.

11. Which Canadian bank has the country’s most popular credit card? Nope, not your bank. Or any other one. It’s actually a grocery store.

(Upon further reading, it turns out most of Canada’s most-loved credit cards don’t come from banks. This should surprise nobody.)

12. And finally, here’s Oddball Stocks, who points out that every business is a depreciating asset. If a business doesn’t continue to invest in itself, it will eventually die. Unlike my Italics Man joke, which will live forever.

Have a good weekend, everyone.

The Simplistic Beauty of a Spending Plan

The Simplistic Beauty of a Spending Plan

Those of you who have read me consistently over the years (thanks for nothing, mom) know I’ve had some anti-frugality views. It would seem I hate it as much as the average Instagram model hates pants. Finally! A joke relevant for 2018!

Too bad it’s not funny.

Quiet, you.

It’s not that I hate frugality, of course. Limiting your spending is an important part of every financial plan. It isn’t much sacrifice, either.

Anyone with a little access to the internet and the patience to wait for decent sales at the grocery store can learn to cook. There are hundreds of enjoyable things you can do that don’t cost much.

Video games can stretch $50 worth of entertainment out over hundreds of hours. I’m still playing MLB The Show 12, a game I acquired for about $10. Each hour I’ve played the game has cost me like 5 cents. And you should see how good my user-created player is. It’s probably my greatest accomplishment.

Many early retirees have taken this to the next level, starting blogs primarily designed to keep them busy, but then turning them into decent side businesses. This ensures they’ll have enough money to survive their withdrawal rate while conveniently explaining the gap in their resume in case they ever have to go back to work. A hobby that generates income is the ultimate frugality hack.

Ultimately, I used to downplay frugality because at the end of the day there’s a limit to how little you can spend. It costs at least $10,000/year to have a paid off house and a car, no matter how cheap you are with the latter. You might be able to get it under that, but not much. By the time we add in food, a little travel, and the rest of the categories that make up the average person’s spending plan, we’re up to at least $20,000 or $25,000 per year.

In short, it costs about that much to function in today’s society. There’s a minimum spend amount.

The challenge in keeping spending down

I firmly believe most people don’t have an earning problem. They have a spending problem.

Think of your friends who are constantly broke. Chances are they’re university educated folks with decent jobs. Many of them probably have a household income of six figures, or close to it. And yet for whatever reason, they can’t seem to get ahead.

The earning power isn’t really the problem here. These folks might think so, but at the end of the day they’re spending every nickel that comes in (and then some in many cases). If their income goes up, so will their spending.

If you’re reading this blog, you likely don’t run into that problem. You’ve got a healthy savings rate and you’re more interested in optimizing your finances. Also your wiener is GIGANTIC. Well done.

Still, we should all strive to constantly improve our financial lives. And the easiest way to start is to come up with a spending plan.

The beauty of a spending plan is it doesn’t have to be very complicated at all. You might set a nice round number of $30,000 annually as a spending goal. That makes the exercise pretty easy. Or you might get into the nitty gritty of each and every budget category, deciding that you’d only like to spend $500 per month on food and $100 per month to keep the lights on.

You can decide to make it as complicated or as simple as you want, with one important caveat. Your spending plan must motivate you to cut your expenditures while maintaining a high happiness level. Because if you don’t have the latter, the former will quickly fall apart.

Making yourself happy should be the goal of every spending plan. If you want the odd splurge here and there, knock yourself out. I’ve been considering taking up golf again, something that would likely cost me $2,000 or so every year if I get a membership. That seems like a lot, especially considering I’d like to keep our spending at approximately $30,000 per year. I’d have two choices — either cut back on the golf or cut back on other spending. I’ll likely play a few rounds next spring and see if I enjoy the game as much as I used to. If the answer is no, I’ll simply find a new hobby. I hear herding cats is fun and enjoyable.

The bottom line

Ultimately, every financial plan is prone to failure if you don’t watch your spending. Frugality is important. Perhaps not as important as increasing your income, but it’s still a major part of everyone’s financial success.

Instead of making it a chore, embrace a spending plan as a way to figure out what brings you happiness. Once you find out something doesn’t do it for you, stop spending on it.

Frugality is something best approached as a challenge. How can you have a happy life while keeping your spending in check? The answer will be unique for everyone.

How My Investment Philosophy Has Changed Over Time

How My Investment Philosophy Has Changed Over Time

Let’s talk about investing today, specifically how I put my money to work. There are a couple of big changes I’ve made over the years as my net worth has gotten bigger.

I’d rather talk about your hot mom.

Really, Italics Man? A mom joke? You’re better than that.

Whatever. You control me, you talentless hack. 

Wow. My alter-ego is a pretty big dick.


When I was 18 years old, after a few years of after school jobs, I had a net worth of approximately $15,000. That cash was mostly tied up in short-to-medium term GICs, which paid approximately 5% annually at the time. Oh man. What a time to be alive.

(I also had a couple grand in a market-linked GIC. Which came due in 2002 or so. My timing was not great there.)

Anyhoo, an opportunity came my way, thanks to my dad. He was an avid real estate investor who owned a dozen or so properties. A local landlord was looking to sell one of his properties, a small two-bedroom house renting for the grand total of $285/month. My dad negotiated with the guy and they came to an agreed price of $16,000.

I jumped at the chance to buy the property, especially after I was told the market could easily demand $350 in rent. After deducting 25% of rent for expenses, I was offered to buy an asset with a 19-20% cap rate. How could I say no to that?

(Fun fact: as soon as a very nervous Nelson went to raise the rent the tenant immediately left. The property was soon re-rented, but there were a few nervous days in there)

This story has a happy ending, too. A full 17 years later I still own that place. I charge the tenant $400/month, which is a little low. Market rent is closer to $450-$500. But he’s been there for something like 12 years. I’ll gladly give long-term tenants a break in exchange for their undivided loyalty. BOW TO ME, PEASANT.

When I bought this property, a full 100% (plus more!) of my net worth was tied up in one asset. This wasn’t a fantastic asset, either. Sure, it had the potential to return 20% annually, but let’s face it. It was a crappy house located in a crummy real estate market. It’s probably gone up 150% over the last 17 years. Other real estate markets have seen a 300-500% increase in the same time period.

But I was comfortable making that move when I wasn’t worth that much. 18-year old Nelson knew $16,000 wasn’t that much money. I could recover if this one investment didn’t work out.

These days, I’m way more serious about diversification. It’s much more about preserving wealth rather than growing it. Now don’t get me wrong, I do want to get richer. I just don’t want to take giant risks to do so. I’m confident my portfolio of great businesses that pay dividends will return 8-10% annually. Sure, I’d like to make 12-15% annually, but to do so I’d have to concentrate my portfolio into 8-10 names I think will do the best. Such a strategy carries much more risk than wide diversification, so I don’t do it.

No more deep value trash

I used to proudly buy the trashiest businesses I could find. If it was cheap enough I’d gladly throw a few bucks at it, content in knowing the assets would eventually come back.

Sometimes, these investments did quite well. I nearly tripled my money investing in a coal mining stock back in 2015, for instance. But most of the time these investments would either do nothing or promptly tank. There are still a couple of zeros in my account, including Danier Leather.

Aside: that is an interesting bankruptcy. I’ll write about it.

These days I’m slowly punting those investments from my portfolio. I sold TransAlta, the troubled Alberta-based power producer for about 10% more than I paid for it. Yellow Pages got punted for a 25% gain. HMG Courtland Properties, a small Florida-based property developer, was sold at a nice gain, too. I even made some money on Dover Downs, a casino in Delaware.

These investments were satisfactory, but ultimately they were crappy businesses that deserved to trade at crazy cheap multiples. Plus it wasn’t really a tax efficient way to go about things. Constantly trading in and out of positions comes with a tax bill each time you sell, unless you do so in RRSPs or TFSAs.

Focus on dividends

One nice thing about owning great businesses is they have the ability to pay nice dividends. These dividends tend to grow over time, too.

Ultimately, however, the focus on dividend investing comes down to this. It allows me to build a tax efficient passive income stream that should grow at least at the rate of inflation for the rest of my life.

Note the two bolded words in that last paragraph. The power of tax efficient dividends are undeniable. As I’ve previously outlined, I can make $50,000 a year in dividends and pay no taxes. My wife can too. There’s nothing wrong with that.

Let’s wrap it up

Is that a condom joke or just a bad way to tell people the post is over? NO TIME TO DECIDE.

Do Intangible Assets Belong on Your Net Worth Statement?

Do Intangible Assets Belong on Your Net Worth Statement?

When I first started investing back in 2003 or so, I was obsessed with buying companies trading under book value. Like most obsessions, this one wasn’t healthy.

Book value, for those of you unaware, is one of the simplest financial ratios out there. If a company’s share price was under the net worth of that enterprise, it traded under book value. Buying $1 worth of assets for 75 cents seems like a pretty easy way to make money, especially if those assets historically traded for $2. All I needed to do was repeat this process a few dozen times and I’d be RICH, BABY.

Alas, it turns out investing is much harder than that. Who coulda thunk it?

These days, book value only enters the equation as a secondary ratio when I’m doing analysis. It turns out there are lots of reasons why it’s not the greatest. Asset values can go down, and companies are not excited to admit this. The logical conclusion to this is obvious; assets that really should be impaired remain fully valued on the balance sheet, giving investors the illusion they’re still worth the full amount.

(Note that book value is still useful when looking at some sectors, like REITs and financial stocks. It’s not a completely valueless ratio)

Intangible assets make up the majority of value when looking at a company’s balance sheet today. Pepsi is a great example. Much of that company’s value lies in its brands. People like Pepsi, Lays chips, Quaker oatmeal, Tropicana orange juice, and so on. Because they like those brands, they’re going to keep on buying them. Both those attributes have value, just like a piece of real estate. But unlike physical property, you can’t easily value them. Intangible assets will always be trickier to value.

How about your own balance sheet?

We’re taught that net worth has a very simple definition.

Assets – Liabilities = Net Worth

Both categories only include tangible items. Stocks. Real Estate. Debt. Note the absence of intangible items. Hell, the next net worth statement I see with intangible items on it will be the first.

But I’m becoming more and more convinced this is the wrong way to go about it. Let’s use getting a college education as an example. As much as I’m anti-college, I’m also the first to admit the statistics are right. People who go to college and graduate tend to enjoy much higher earning power. Let’s say the average university graduate earns $1 million more in their life versus the average high school grad. Sure, there are some duds who took gender studies in there, but they’re cancelled out by all the finance and engineering folk.

Now let’s imagine the net worth statement of a recent college grad. Assets likely are pretty close to zero. Liabilities are through the roof, thanks to all the debt taken on to fund the degree. We’re left with a negative net worth and a recent grad hopefully super motivated to get that ratio back to positive.

This isn’t entirely accurate, however. That debt wasn’t acquired for shits and giggles. It exists because becoming proficient in a topic is profitable. That knowledge is clearly worth something, yet it’s never put onto a net worth statement. Why is that?

There’s one very simple reason why not. Like the value of Pepsi’s brands, it’s tough to figure out. There are also a million variables that could impact the value of that intangible asset over time too. Is a degree really so valuable if you plan to drop out of the workforce in five years to start pushing out babies? Or because you want to work 15 years and then retire early? Degrees are still worth something to these folks, but perhaps not as much versus someone who plans to use their degree for 40 years.

One could argue the benefits of the college degree end up on your net worth statement anyway, thanks to the increased income it provides. Okay, fine. I’ll allow that. But what about other intangible assets? Unless you’re a weirdo hermit living in your mother’s basement (THAT’S ME, BABY!), you know people. Those relationships have value. They could lead to a lucrative new job or a business opportunity. It’s the same thing with your family. I know a kid whose family is worth anywhere from $20 to $50 million. His last name absolutely opens doors for him. Why shouldn’t he be allowed to put that value on his own balance sheet?

The bottom line

I admit this becomes a slippery slope very quickly. It also opens up all sorts of uncomfortable questions about privilege and whatnot. And to be completely honest, I think allowing people to put intangible assets on their net worth statements is a bad idea. The average person overvalues the hell out of everything they own. They’ll do the same with their university degree and contacts.

But at the same time, these intangible assets are hardly worthless. They’re definitely worth something, even if it’s hard to value. They shouldn’t be immediately valued at nothing. Keep this in mind while paying off your college loans and it’ll make that journey a little better. It might even cure someone of the “student loans must be paid off at all costs” mentality.