1. After purchasing six to eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small.
2. Overall market risk will not be eliminated merely by adding more stocks to your portfolio.
- Do your own work.
- Don’t trust anyone over thirty.
- Don’t trust anyone thirty or under.
- Pick your spots.
- Don’t buy more stocks; put money in the bank.
- Look down, not up.
- There’s more than one road to investment heaven.
- Spin-offs, in general, beat the market.
- Picking your spots, within the spin-off universe, can result in even better results than the average spin-off.
- Certain characteristics point to an exceptional spin-off opportunity:
i. Institutions don’t want the spin-off (and not because of the investment merits).
ii. Insiders want the spin-off.
iii. A previously hidden investment opportunity is uncovered by the spin-off transaction (e.g., a cheap stock, a great business, a leveraged risk/reward situation).
- You can locate and analyze new spin-off prospects by reading the business press and following up with SEC filings.
- Paying attention to “parents” can pay off handsomely.
- Partial spin-offs and rights offerings create unique investment opportunities.
- Oh, yes. Keep an eye on the insiders.
- Risk arbitrage – NO!
- Merger securities – YES!
- Bankruptcy – some points to remember
i. Bankruptcies can create unique investment opportunities – but be choosy.
ii. As a general rule, don’t buy the common stock of a bankrupt company.
iii. The bonds, bank debt, and trade claims of bankrupt companies can make attractive investments – but first – quit your day job.
iv. Searching among newly issued stocks of companies emerging from bankruptcy can be worthwhile; just like spin-offs and merger securities; bargains are often created by anxious sellers who never wanted the stuff in the first place.
v. 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 the swift nor the battle to the strong – but that is the way to bet.”
- Selling Tips
i. Trade the bad ones; invest in the good ones.
i. Tremendous values can be uncovered through corporate restructurings.
ii. Look for situations that have limited downside, an attractive business to restructure around, and a well-incentivized management team.
iii. In potential restructuring situations, also look for a catalyst to set things in motion.
iv. Make sure the magnitude of the restructuring is significant relative to the size of the total company.
v. Listen to your spouse. (Following this advice won’t guarantee capital gains, but the dividends are a sure thing.)
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 (with the possible exception of stub stocks) where research and careful analysis can be rewarded as quickly and as generously.
3. Warrants and Special Situation Option Investing. There is almost no other area of the stock market (with the possible exception of stub stocks and LEAPS) where research and careful analysis can be rewarded as quickly and as generously.