Benjamin Graham profited from opportunity.
Sure, the father of value investing gave us the analogy of Mr. Market and the concept of "margin of safety." But his real claim to fame was making lots of money from special stock opportunities called "net-nets" -- stocks trading for less than two-thirds of their net current asset value. When we get right down to it, that's what special-situations investing is: finding mispriced opportunities with special circumstances.
It's nice to find great companies at good prices, but we shouldn't neglect other, potentially lucrative types of investments. Warren Buffett sought special situations, such as American Express
Special situations investing methods
The net-net deep-value opportunity is not the only type of special situation. In turnaround situations, a company with problems fixes them and gets back on track. Peter Lynch loaded up Fidelity Magellan on Chrysler when the automaker had to overhaul itself.
There are also spinoffs, a favorite of David Einhorn of Greenlight Capital. He's got two big ones in his portfolio: Ameriprise
And sometimes an investment's value is hidden from view, leading the market to misprice it. Our own Bill Mann found Fairmont Hotels before it went private, while it was trading for less than the value of its premium hotels.
Fools, beware: These situations are not for novice investors. (Do you know what net current asset value is?) To help you learn more about them, and to expose you to other special situations, we've compiled a great batch of articles. Some come with warning labels, some have complex economics, and some require digging deep to find value. Along with the examples, we discuss the mind-set required to put such investments to work. Click the links below to start learning how special situations can be opportunities knocking at your door.
A smorgasbord of starters:
- Bill Mann provides a primer on special-situations investing.
- Determine whether deep-value investments are heroes or zeroes.
- Learn how to start building wealth today.
- Asymmetry is your friend if you have a probabilistic mind-set.
- Uncover secret advantages for small investors.
Explore different kinds of turnarounds:
Meet other special situations that occasionally appear:
This article originally ran on March 7, 2007, and has been updated.
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