Returns from Special Situation trades

[skanjete]

Spot on: special situation investing = "the market pays you to feel like shit... "

[BG2008]

I think it’s terrible advice for special situations. Your buying them for the specific situation, not for the long run. If the situation is attractive it’s worth investing, it’s as simple as that.

 

I think the problem is that if the special situation doesn't work, you're left holding a bag of dog poo.  Howard Hughes is a really good special situation right now.  I am not going to go into the specifics of why I think it's worth a lot more than the current price.  A lot of that analysis is years of research and meeting with management.  The company has told you it's exploring strategic alternatives.  It's not like NYRT in its liquidation.  I would go so far to say that it is currently the mother of all special situations.  If it isn't for the size of the position, I would probably be buying more.  If they sell the company, you'll likely get a lot more than the current price.  If they don't sell the company, short term pain.  But the company is still worth a lot more than what it is trading at.   

[scorpioncapital]

special situations should always be done as a basket, to diversify away the risk of some disasters that break.

however, what I meant was that if you are going to concentrate in a special situation then it should be one where you like the company enough to have to hold it in the worst case, or alternatively a situation where there is minimal loss either way.

[writser]

All these beautiful rules:

 

- special situations should always be done as a basket

- if you concentrate you have to like the company

- minimize losses

 

Are overly simplistic. Judge each situation on its own merits. Size appropriately according to the risk/reward. A loss is a perfectly acceptable outcome if the potential profits make up for it. It seems you are more focused on minimizing potential losses and potential disappointment rather than maximizing expected value, which nicely demonstrates the point I was trying to make a few posts before. The market pays you to own the crap others don't want to hold because it makes them feel like shit.

[scorpioncapital]

I don't believe in expected return. It's a garbage concept.

My feet are in the oven. My head is in the freezer. On average, I'm perfect temperature. In reality, I'm dead.