Category Archives: Investment Philosophy

Business Articles, Investing, Investment Philosophy, Value Investing

Special Situations Investing

“Sometimes Political Pressure Comes From Shareholder Value Creation”

This Week’s Post will dive into Special Situation Investing and how this investment niche can be used in the Market to sometimes force Corporate Governance, Management, and Boards of Directors to hold a Proxy contests to install a new outside Director on to a unfriendly Board Of Directors. They elect a new outside Board Of Directors member to correct the board alignment. Creating shareholder value.

According to Investopedia: A special situation is an unusual event that compels investors to buy a stock or other asset in the belief that its price will rise.

Activist Investing

Sometimes Special Situations Investing is referred to by some Investment Professionals as “Activist Investing.” Special Situation Investing by definition has little to do Security Analyses. And more to do with buying a controlling percentage of shares of at least five percent to force a vote to elect an outside member to the Board of Directors. Often this person is a Fund Manager, or elected member of the investor. With this said there is Risk involved with these actions and proxy vote contests.

“Attention:” The following content or post is a general post about “Special Situations Investing”. And is not to be construed or intended to be “How to Invest in Special Situations”.This post is meant to be a general outline of the topic related and share stories related to Special Situation investing. Entertainment only. Meant to be examples of stories. Thank you all Investment Fund Mangers who are close to me. They are always challenging me to be better. That’s respect. Thank you. Are the Markets Efficient? After realizing markets are far from Efficient like the media and some academics likes to proclaim. It’s clear Special Situations has a long history of wins by very notable prolific Investors. And some very publicly losses that have ruined some Fund Managers.

Value Investing Spectrum

Value Investing can be described as paying less for a piece of a company in the market than the actual intrinsic value of the company. You will find that most Value Investors like myself and other close followers of Warren Buffett, Charlie Munger, Li Liu, Ben Graham, Guy Spier, Bill Ackman, Mohnish Pabrai etc. choose to invest for the Long Term.

However Value Investing has a spectrum of Investment Philosophy’s. Some Value Investors like Howard Marks, Bruce Karsh choose to Invest in the Long Term specializing in asset classes like fixed income as Investment Vehicles. Other Value Investors like Mr. Bill Ackman has chosen earlier in his Hedge Fund Career to use “Event Driven – Special Situations Strategies” for his Portfolio’s advantage. A great example of a Successful Trade is when Mr. Ackman generated a 100 fold return during the Pandemic by foreseeing the Impact the Corona Virus would have on the country’s linked communities.

Bill’s Corona Virus Hedge Trade yielded $2.6 billion in profits. If we look at the position or bet Mr. Ackman bought? His traders bought as much Hedged Protection they could find in the market to Hedge Pershing Square’s Portfolio of Investments before the Corona Virus pandemic. In the end his bet on the market falling was proven right. And It is celebrated as one of the Legendary Trades on Wall Street during this time Corona Virus Time-period.

The Value investing spectrum includes all Asset Classes and can even be applied to the Commercial Real Estate space. However the spectrum of Value investing is like a umbrella of different areas of specialities. From Special Situations Investing to buying undervalued assets like securities. Investing in general can be simplified by the following thought. Buy Low, hold long term, Sell High.

Believe it or Not? Investing in general is pretty simple. Special Situations Investing is a complex topic. But for the purpose of this post I will keep it simple and not make this a long drawn out white paper for other Investors who love to nerd out on this topic.

Understanding Special Situation Investing

Typically a “Special Situation arises from a News Event happening in the Market, a Stock may have intermittently dipped below it’s intrinsic value during a short tie period. Other forms of events include; Rumors in the market that point to spinoffs, tender offers, Mergers happening soon, Acquisition speculation, Bankruptcy, litigation, capital structure dislocations, shareholder activism, stock buybacks, and other events that may affect a company’s short-term prospects.

  • A special situation is a special event or one-time event that has an impact on a stock or other asset.
  • A Series of Events could have a negative or postive affect on a stock price.
  • There are Special Situation Funds ready at a moments notice to act on events and profit from events.
  • Nearly all Special Situation Investing is executed by a Institutional Investors.

In light of impacts Special Situations events have in the Public Markets, we must stop and ask will the outcome be a Positive Impact or Negative Impact? Often times Special Situations can either be positive or negative depending on the action or intent by the Institutional Investor. Sometimes the Institutional investor profits from a misfortune or failure that is occurring to a Public Company. And sometimes the Public company can be positively impacted by the Investor creating Shareholder value.

Activist Investor Challenges The Board Of Directors Status Quo

Let’s say for an example a Board of Directors is being run by a short sighted sloppy CEO and Chairman. And this complacency is causing the Board of Directors to fall into following the herd and not making waves. They have put their own comforts and expenses before the shareholders interests. This has caused a situation where status quo is the normal operating governing procedure. Causing the Public Company to lose it’s way affecting the company’s financials. Ultimately the stock price falls and the company loses Market share. None of the Directors on the Board want to bring attention to the failures and just go along to get along type situation.

For many quarters the Public Company has falling sales, revenues and all the financial Statements are impacted. An outside Institutional investor or Portfolio Manager see’s the news and decides to take a closer look and does some due diligence. Only to find the Public Companies Board and management are acting irresponsibly with company funds and assets. Putting their own interests before the Shareholder.

The Institutional Investment Team decides to act. And begins purchasing all the Shares they can buy on the open market. Until they have bought a controlling interest in the company. This act by the Institutional Investment team can force the Boards of Directors to hold a Proxy Vote. Removing a member of the Board of Directors and Shareholders electing a new Board Member (Often from the Proxy Challenger “Who is The Institutional Investor who invested.”)

This in turn will begin to align shareholders interest and create shareholder value. And with this new Outside Board Member elected to the Board? The Companies management will have a new objectionable voice who won’t allow the CEO and Chairman to hold congruent votes. Shaking up the “Go along to Get Along” Boards procedures.

This is important because this new voice on the Board of Directors can suggest or demand new ways to fix the companies future direction. Often times by insisting the Board instal a new CEO, and or taking a close look at what is not working correctly in the Managements operations that is affecting the Companies financials. This action can and often will correct a companies future profitability and growth. Or can make matters worse. It all depends on the situation within the Board Room.

Proxy Votes and Fights

When we think about Proxy Fights between Activist Investors and Boards of Directors and Management. This really begins to get into the political area of Corporate Governance. And these disagreements are certainly a gray area of Policy and Law between Boards of Directors and Outside majority Shareholders. I wrote a little about these situations above. However if your really interested and want to read all about Proxy Votes and Proxy Fights? I would highly suggest reading Michael Levin’s “The Activist Investor Newsletter Website HERE.“

“The goals of electing a new outside Board member usually are to align shareholder interests and generate Shareholder Value.”

-Bill Ackman

Investment Strategy – Share Buy Backs

A share buy back is another example of a special situation and will cause the stock of a company to trend upwards in the short term. On the other hand a negative impact could be such as a Government Antitrust inquiry may push a Public Companies stock price into falling for the short term. News sometimes of Events happening in the world of Business Litigation will and do often times do cause price speculation and investors to capitalize on opportunities happening publicly.

Merger Arbitrage “Opportunistic Investing Model” Special Situations

When a public company intends to merge with another medium to large company that is also publicly traded a special event occurs. And this event is usually extremely profitable. Company Board Members and even Executive Management have a personal and professional duty to keep confidential company information safe from the public. In other words they are charged with “Keep it Confidential” Policy or you will be shown the Door.

Sometimes outsiders in the Companies hemisphere create “Rumors”. And these rumors sometimes are false or true. Or they maybe a little of both. Your typical Sophisticated Investor knows; “When you create a list of well positioned companies that more than likely will be acquired soon.” You create an opportunity to capitalize on Public Companies who are merging. And this leads to the Public Company buying market share. Generating Dominance. This is a profitable strategy for Special Situations Investors.

Bill Gross who is a Prolific Philanthropist and Investor has said on CNBC in 2023 to look for Merger Arbitrage opportunities. This is where he was looking in 2023 for Money makers rather than focusing on the usual in Credit Markets. Here is the Video of Mr. Gross sharing his Opinion about where he is Investing in 2023.

Special Situation Example

Bill Ackman Vs. Carl Icahn + Dan Loeb = Public Market Brawl “HERBALIFE”

First I want to highlight a knockdown investment market brawl that literally had the Financial World on the Edge of their Seats when Pershing Square’s CEO and Chairman Mr. Bill Ackman took on a Public Company that was “allegedly” taking advantage of Hispanic Migrants in the communities across the United States using unfair distributorship and salesman tactics that are propelled by dubious Multi Level Marketing Practices. Mr. Ackman felt by releasing unseen information and bringing attention to the predatory Salesmanship and unfair Distributorship Multi Level Marketing happening to these poor unsophisticated Migrants the Market would correct the Market Pricing forcing the company to correct its policies while Mr. Ackman’s fund would profit off-handedly from the correction. While Mr. Ackman was dong the Market and the Migrant Community a Community Service that the Government could not.

This is not what happened. Instead of the Market taking corrective action another professional Investor named Carl Icahn and another activist named Dan Loeb worked separately to short squeeze Mr. Ackman’s Funds Herbalife Short Position. It’s likely the intent of Icahn’s involvement was for the unfair purpose to punish Mr. Ackman for a previous perceived Slights. I am not a Icahn expert. And never want to be. However Mr. Ackman previously pursued litigation against Mr. Icahn forcing Icahn to court when he refused to pay up. A Judge forced Icahn to pay a Profit margin on a previous investment agreement. This is an brief example of a Special Situation that had all the Hallmarks of being a Good Faith Action for the market and to help the American underserved Migrant Community. But just went terribly awry for a very Good man and Community Leader. If you would like to read about more details of this Special Situation? Please Read About It Here In Vanity Fair. Or Watch Bill Explain his actions below with Lex Fridman.

Elliot Investment Management L.P. Vs Proctor & Gamble

In 2003 Elliot Investment Management Partners formed the opinion Proctor & Gamble was not being fair in offering all Preferred Shareholders a fixed price while it tactically acquired German Hair products company “Wella A.G.”. A collective of Investment Funds along with Elliot opposed the Boards proposal to acquire the German Hair Products Company. Even one of Germany’s largest Fund Managers “Deka Investments” joined in the Special Situation to force a Shareholder Proxy Vote of Proctor and Gambles Board Of Directors. After many years of Litigation P&G capitulated and offered all Preferred Shareholders a raised fixed price offer. Elliot stated: “The Goal of the Investment Funds joining forces against P&G was to protect the rights of Minority Shareholders.”

Risk & Special Situation Investing

Public Companies provide the most opportunities for Special Situations. Senior to Subordinated Debt Securities are often analyzed and used for Special Situations. Did you know? “Event Driven Investing is often referred to as Special Situation Investing.” The Risk involved in special situation investing is inherently dangerous to Investors who do not stop and understand that this area of investing is unique and filled with uncertainty. Situations and life that you do not control can be seriously risky. Often change at a moments notice. So on the spectrum of Investing. Special Situations or Event Driven Investments usually are categorized as some of the most Riskiest Investments a Institution or Investor can make.

Conclusion

It’s clear Special Situation Investing and The Funds raised for this investment strategy are extremely unique and can move markets. It’s serious business. And has serious consequences for Management, Boards of Directors, Shareholders and even for Communities. Most of the Special Situation Investment Activity we see in the Market is executed by very experienced Investment managers. The truth of Special Situations Investing is generating Investor returns. I guess it can be said there is Value in taking a Company to court for the purpose of? Standing up for minority shareholders. Or more descriptively when Bill Ackman decides to Buy Hedging Positions to protect his Shareholders (like me) from a possible portfolio collapse during a Pandemic. I can see the positivity and responsibility in Mr. Ackman’s Hedging Positions.

But make no mistake there are those out there who do use Special Situations under the radar. These Opportunistic Investors who use “Special Situations Investment Strategy” can most certainly be a force of greedy negativity! I won’t name names. But frontline has made documentary’s on this topic. You can watch youtube for more on this criminal topic.

In reality it does feel like there is Political undertones in certain Special Situations Investing. However I feel as long as the Regulators at the S.E.C. and our fellow Institutional and Retail investors see the negativity Special Situations Investments for what they are. We can put the Bad Actors who use Special Situations for greedy unhealthy purposes out of business. Making our communities better in the process. Capitalism is all about making things better in our communities and in our markets. I just hope this philosophy works for Special Situations as well.

Thank you for reading. Godspeed.

JS

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Business Articles, Investing, Investment Philosophy, Learn About Investing

Qualitative Growth Investment Philosophy

This post will share and demonstrate what is written and communicated inside of Phil Fischer Book which is the origin of Qualitative Growth. A investors greatest concern should be managing Risk. If you manage to understand your business and all it’s unique qualities while considering Risk? It’s likely you have stumbled upon the foundation of Qualitative an Growth Investing Principles.

Asking detailed hard questions. Example: When we buy or invest in any company or security? It is only natural to ask detailed educated pointed questions and do some due diligence before we make that investment. And if we add in the fact we are not seeking dividends? That is basically the foundation of Phillip Fisher’s Investment Philosophy Growth Investing. Let’s get into some examples of questions and details.

Charlie Munger may he rest in Peace long ago when Berkshire was growing. Convinced Warren Buffett to begin considering and partially adopting the Phil Fisher philosophy of investing to implement into the Berkshire’s strategy. If I remember correctly this video should help. Warren Buffett starts by sharing Phil Fisher’s Book is one of the best Books on Investing.

Who is Investor Phillip Fisher

Philip Arthur Fisher was an American stock investor best known as the author of Common Stocks and Uncommon Profits, a guide to investing that has remained in print ever since it was first published in 1958. Mr. Fischer basically began using his insights as a Investment Philosophy. Example, assume If a stock is going to outperform the market longterm? In this case it does not matter what the current price is! Becuase the performance over time will outpace the price volatility and increase if you have done your due diligence and leg work correctly.

Mr. Fisher focused on Qualitative Fact finding and positive assumptions backed by verifying tangible information. The fact he did such heavy investigating is that his findings may lead to a Stocks growth and having the right information for his investment fundamentals over the longterm.

Put another way? Qualitative investing requires assumptions about the future that are made on the basis of quality. An analyst will make judgements on the prospects of the stock based on the qualitative attributes of the company.

Mr. Phil Fisher career began in 1928 when he dropped out of the newly created Stanford Graduate School of Business (later he would return to be one of only three people ever to teach the investment course) to work as a securities analyst with the Anglo-London Bank in San Francisco.

Growth & Qualitative Investing

Mr. Fisher wrote in his book detailing a basic checklist that helps investors sift and sort through Stocks and Investment Opportunities using Qualitative and a checklist of sophisticated questions that arrive at a “YES,NO or Maybe” conclusion. This strategy of investing gave birth to Growth and Qualitative Investing.

Asking Questions that helped Mr. Fisher?

  • Does the company have excellent management teams?
  • How is the Business’s Qualitative Fundamentals on the Balance Sheet rather than using ratios?
  • Stock Price is not evaluated. So if a Stock is Expensive currently Fischer’s reasoning looks towards the long term growth of the business which will outperform short term stock pricing models.
  • If a investment fails any of the questions on the Checklist after investing? Mr. Fischer makes it a point to move on selling the investment.
  • Understanding the Business and what makes the business work? Valuable question.
  • R&D Spending? If target company is outspending and outperforming competitors? This is a good indicator or qualitative fundamentals at work within the business.
  • What makes the Business grow? Very important to understand.
  • Does the Business have repear customers?
  • Business profit margins must be healthy.
  • Does the Executive Management have outstanding community relations?
  • Is the cost analysis and quality controls of the business products and services accounted for? Will this share information about operations?
  • Is the Companies Management Integrity Unquestionable?
  • Would you want your family to work in this business? And does the community value the Business’s presence?
  • Is there room for growth in the space and is the company’s management providing information about current industry forecasts?

These are all questions Mr. Fisher has shared in his Book written in 1958, which have withstood the test of time. And yes many of these questions have evolved with time into my own use. And in all fairness most of these assumptions or questions still very much apply and are used today by Institutional Investors and Professional Investors who manage Fund’s. You may recognize some of the fellow Buffet followers who use these methods of Investigating Investments. Professional Investors and Fund managers like Guy Spier, Christopher Tsai, Li Liu, Chuck Akre, Seth Klarman, Peter Lych, Bill Ackman and many more.

Conclusion

In Conclusion for today’s post on learning more about Growth or Qualitative Investing Philosophy, we must look at what works in the markets as legitimate Investment Philosophy and what doesn’t work. If you consider most individuals investment experience and ability to mitigate and consider investment RISK. Most retail investors who day trade do not have Advisors. This ends up making them lose money and treat the Stock and Credit Markets like a Casino. Their goal is always the same. They are hoping and praying that twenty dollar stock they just bought with their life savings will rise in the next week or few days. But this is absolutely not how the Professionals invest. Nothing about investing can be done from feelings or judging ones own intuition! It takes serious investigation and professional trained discipline.

Individuals who don’t use any Investment Philosophy will likely be humbled by the sudden unemotional Market Volatility. Magellan Fund Manager Peter Lynch loved volatility for this exact reason. He used volatility to invest as a Value Investor during times were Fearful. So in all fairness? I think it’s safe to say after reading the Book by Mr. Phil Fisher the more sophisticated detailed and creative questions we ask about a Investment opportunity? The better off we will likely be years down the road. Thanks for reading everyone Please do read Mr. Phil Fisher’s book. Uncommon Stocks and Uncommon Profits.

I appreciate you reading my Post. It was a blast preparing this for you. And to my fellow Professionals who do run Investment Funds and use Mr. Fisher’s Investment Philosophy? Please do drop me a line to correct anything I may have written or shown in this post that is incorrect. I am doing my best with what I have. Thank you. JS

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