As I’ve written before, this newsletter is like a public notebook for me: a place where I jot down my ideas (and non-ideas) to organize my thoughts, expose blind spots, and sharpen weak or incomplete arguments. I write up far more stocks than I own, since I’m a concentrated investor. These writeups stem from my daily hunt for ridiculously cheap, off-the-map stocks, where something catches my eye for some reason.
With value principles hammered into my head since my induction to the investment game, my priority and fiduciary duty is always to assess the downside first. Although I try to scour every stock out there, this downside-focused process often tilts me toward special situations investing.
Let me be clear: special situations investing isn’t inherently better than other types of investing. However, I often find that:
- You’re more likely to unearth market mispricings, and
- those mispricings are often easier to frame in a risk/reward proposition
In any investment, what you’re looking for is predictability. And I don’t necessarily mean in terms of cash flows. I mean predictability in terms of the risk — the probability distribution of outcomes. Risk can be managed through position sizing, whereas uncertainty can’t. Risk is when you know the shape of the probability distribution; uncertainty is when you don’t.
Special situations, or what Buffett would call “workouts” during his partnership years, are a lucrative pursuit because they carry relatively low uncertainty, irrespective of their levels of risk. Your potential return may often be capped, but it can be highly attractive on an annualized basis (with the downside being that you need to have a continuous stream of ideas) and you can easily see the risk in front of you, allowing you to size your bet accordingly (using the Kelly criterion).
Secondly, some special situations deliver what insiders call “absolute returns”, marching to their own beat, not the market’s.
The special situation we’ll discuss today offers a ~20% IRR, ± the risks we’ll try to spell out. While this may not thrill those chasing recent market exuberance, I believe the range of outcomes here is narrow, making this return compelling compared to other opportunities out there. (Last October, Goldman Sachs projected the S&P 500 could return just 3% per year over the next decade, or ~1% after inflation.) The situation here is a planned orderly liquidation, and the company is liquid, with an average $10-12mn trading hands daily.
The company’s name is…