Investing in Special Situations

The term Special Situations in investing was popularized by Joel Greenblatt in his book You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits (the book’s content by far outperforms its cheesy title). As the plurality of the term indicates, it is an aggregative term for different types of situations. What they all have in common are that they are arbitrage opportunities with a clearly defined timeline and limited risk.

In the Buffett Partnership letters, Warren Buffett explains to his clients how he uses special situations as a strategy to generate investment returns. In the letters, he calls them Workouts, due to their resolution having a fixed timeline.

In fact, the origin of both terms traces it’s origin to Ben Graham, as a subsection in chapter 15 of the Intelligent Investor is called Special Situations or “Workouts”. As the book is intended for laymen investors, Graham spends little time discussing these situations.

Workouts are Arbitrage opportunities

In its essence, what special situations often present to an investor is an opportunity to arbitrate on mispricing between assets or markets. In that way, the investor can hedge his bet by simultaneously buying and selling a set of securities in order to eliminate risks out of the equations.

Types of Special Situations

  • Spinoffs
  • Rights Offerings
  • Risk Arbitrage
  • Merger Securities
  • Bankruptcies
  • Recapitalizations
  • Stub Stocks
  • LEAPS
  • Warrants
  • Options