Extra Credit: Investing In Special Situations

Do you remember extra credit from school?  Extra credit was the ‘bonus points’ awarded for doing just a little extra homework or answering a few extra questions on an exam.  It was easily one of my favorite parts of school.

Why?  For a little bit of extra effort I could boost my scores from ‘normal’ to ‘excellent’.  Extra credit was one of those incredible “can’t lose” situations — get the question right and you get the bonus points, get the question wrong and you lose absolutely nothing.

As it turns out, extra credit actually exists in the real world.  For people willing to do some extra work, there’s thousands of side hustles that are the financial equivalent of ‘extra credit’.  Often this real-world “extra credit” only requires being in the right place at the right time to capture the opportunity.

Today’s post is about one of my favorite forms of “extra credit” in the real world — Investing in special situations.


What Is A Special Situation?

Special situations are investing opportunities that arise when irregular business activities occur.  These irregular activities include mergers, spinoffs, bankruptcies, investor activism, tender offers, restructurings, litigation, turnarounds, capital allocation policy changes, and a host of other possibilities.

By investing in these unique situations, investors can sometimes realize incredible profits.

Despite the use of the words ‘irregular’ and ‘special’, these situations do happen fairly frequently in the investing world.  There’s always something happening in the business world.

For astute investors willing to do a little ‘extra credit’, special situations can be an incredible way to boost your investing returns.

Please note:  Special situations are usually not for beginner investors.  As I said, extra credit requires extra work.  Consider yourself warned.



Spinoffs are one of the easiest special situations to take advantage of, and they happen all the time.  They’re also a good place to get started for investors new to special situation investing.

Spinoffs happen when a large company decides to sell or “spinoff” a smaller division of the larger company.  Typically spinoffs happen because the smaller division doesn’t ‘fit’ within the larger company and it’s true market value isn’t realized as part of the larger conglomerate.

Spinoffs can also be a way for management to separate a ‘bad’ business from a ‘good’ business.  While words like ‘bad’ and ‘good’ sound pretty scary, it’s a well studied fact that spinoffs (even the ‘bad’ ones) can perform very well once they’re freestanding entities.

It makes perfect sense when you think about it — by shedding the inefficient bureaucracies of large corporations, entrepreneurial forces become unleashed and ‘average’ businesses can become above average investments.

spinning top
Spinoffs come in all different shapes and sizes. Do your homework to find out exactly what you’re getting!

Typically you invest in spinoffs in two ways — By purchasing shares of the parent before the spinoff, OR by purchasing freshly spun-off shares in the open market.

Not all spinoffs are going to be successful investments of course, but many are.  Studies like this one from Purdue have shown that most spinoffs do quite well — frequently beating the market.

Interested finding some spinoffs to invest in?  Check out this list of upcoming stock spinoffs.



Yes, bankruptcies can be special situations!  While the bankruptcy of a public company is not a common sight, it does happen from time-to-time.

How do you ‘invest’ in a bankruptcy?

Well, it’s a little tricky — First, existing equity shareholders are typically wiped-out during a bankruptcy, that’s almost a given.  However, bondholders often end-up with equity (shares) in the newly reorganized company.  The idea is to buy-up debt (bonds) for pennies on the dollar which is then converted to shares in the new company.  Pennies become dollars.

The result is often very large gains, even when the ‘stench’ of bankruptcy is still wafting around the reorganized company.

Yes, I said ‘stench’.  Never mind that debt levels are usually reduced to reasonable levels — Investors frequently treat companies that have emerged from bankruptcy like they’ve been swimming in raw sewage.  The shares often trade very cheaply when compared to similar firms.

sewer grate
Long after the mess has been cleaned up, the stench of bankruptcy lingers with the reorganized company.

This is the second way to invest in a bankruptcy — buy shares in the newly reorganized company after they’ve been re-listed.  Usually they’re dirt cheap.  If you can manage to hold your nose for a few years (until the smell of bankruptcy wears off), some very good gains can be realized.


Acquisitions & Mergers

When two companies merge together, the acquiring company usually pays a premium over market value.  This premium is a boon to existing investors because it often means quick profits.

Astute individuals might imagine they could purchase shares in the acquired company (at less than the offer price) and realize a profit…

Unfortunately, it’s not so easy.  Being able to jump-in on a merger after the deal is announced is almost never possible.  Professional investors in this field called “risk arbitrage” quickly acquire every share they can.  The market price for the acquired company’s jumps to the purchase price almost immediately.

Let me use a real world example to illustrate the difficulty here — One of my current favorite investments, LyondellBasell (LYB) is attempting to acquire A.Schulman (SHLM) for $42 per share in cash.

The deal was announced in a press release before markets opened on February 15th.  On February 14th, A. Schulman’s shares closed at $38.65.  By the time markets opened on February 15th, the shares traded at $43.20.  Yes, that’s above the deal price.

shlm share price
Shares of A. Schulman jumped 15% immediately after the LYB deal was announced.

You would have needed to hold shares before the deal was announced to realize that 15% profit.

Fortunately for small investors, mergers often take years to resolve.  There wasn’t an opportunity to profit on February 15th, but there could be one in the future.  Deal prices can change, and market values are always fluctuating.  It pays to pay attention.

There are also special securities (preferred shares, warrants, bonds, etc) that get issued during mergers.  These esoteric securities frequently get ignored by investors, but can often make for great investments.  (For the curious, I’ve written about my successes with preferred shares in the past.)

If you’re interested in learning more about how to profit from mergers, I recommend Joel Greenblatt’s book which covers the topic, and Risk Arbitrage by Guy-Wyser Pratte.  Both these texts go into a good amount of detail on mergers.


Investor Activism

One of my favorite forms of special situations today is Investor Activism.  You’ve probably read about it in the  news — Typically, a hedge fund manager acquires a controlling interest in a troubled (or poorly run) company and then pushes management for change.

The great part of these deals is that anyone can join in.  If you agree with the thesis of the activist investor, you can actively purchase shares and vote in the proxy battles.

Sometimes these deals work out great — In the case of Cracker Barrel (CRBL), activist investor Sardar Biglari purchased 18% of the company back in 2012 and proceeded to bully Cracker Barrel’s executives for years to see improvements.  Investors did very well.

Shares of CRBL went from $60 per share in 2012 to $157 per share, trouncing the S&P 500.  Dividends quadrupled in the span of 5 years, going from $1.15 per share to $4.65 today.

cracker barrel share price.
If you had invested along with Biglari, you would have nearly doubled the return of the S&P 500.  In that same time period Cracker Barrel’s dividends quadrupled.

The best part of this special situation?  Anybody could have taken part.  All the documents were published and available to the public.  As it turned out Biglari was right, and investors that followed along profited handsomely.

Sometimes activist investors fail miserably too — The most famous case being Bill Ackman losing about 90% of his initial investment on a bad investment in Valeant.  It was quite the disaster.

As with all investments, tread carefully.


Final Thoughts

This post was just a sample of the many special situations that can arise when investing.  There are many more I didn’t discuss here!

Over the years I’ve personally invested in many special situations — spinoffs, mergers, activist situations, and even companies recovering from bankruptcy.

Sometimes I was simply in the right place at the right time, buying cheap stocks when the bigger sharks were circling.  I’ve also followed activist investors into poor companies and done well when changes were implemented.  Other times I’ve held my nose and invested in companies emerging from bankruptcy.  All of these situations worked out great.

Right now, I’m only invested in two special situations — The upcoming DowDupont (DWDP) spinoff, and a company recently emerged from bankruptcy (LyondellBasell).  These two situations comprise about 20% of our portfolio.  While it’s possible that either of these special situations could turn into losers, I’m betting not.

Only time will tell.

If you’d like to learn more about the topic of investing in special situations, I highly recommend Joel Greenblatt’s book “You can be a Stock Market Genius”.  Yes, the title of the book is terrible — but it’s actually a really excellent book on special situations; filled to the brim with interesting case studies.

stock market genius
One of the best books on special situations around.

Of course, most investors don’t need to look for special situations to realize good returns.  A well diversified portfolio of index funds can provide sufficient return to reach financial independence.  You don’t need to touch a single special situation in order to do OK.

That said, the extra credit is out there for people willing to do the extra work… just like in school.  Some people actually enjoy investing — For those willing few, investing in special situations can be an incredible source of ‘extra credit’ for your investing portfolio.

Good luck!


[Image Credit: Flickr1, Flickr2, Flickr3 ]

22 thoughts on “Extra Credit: Investing In Special Situations

  • February 28, 2018 at 5:16 AM

    Love this! It’s refreshing to hear from a blogger who is interested in the more nuanced versions of investing and not just index funds all the time.

    Have you seen the video of Icahn and Ackman? https://www.youtube.com/watch?v=hCZRk1lL90Q

    It’s one of the most hilarious HF spats I’ve ever heard of. The amusement factor of Herbalife has been off the charts.

    If you’ve never read confidence game, it details Ackman’s fight against MBIA. Michael Lewis’s The Big Short went over a lot of people who called the 2008 crisis, but he didn’t feature Ackman. His story is pretty interesting.

    • March 2, 2018 at 1:16 AM

      That video was pretty hilarious. Thanks for sharing it Olivia!

  • February 28, 2018 at 8:45 AM

    Yes I remember those extra credit assignments! They can be a great way to boost our grade or a life savior for someone who wasn’t paying attention during the semester.

    I never made the connection between extra credit and side hustles/investment thought. That’s really creative! I learned something new today!

    • February 28, 2018 at 9:12 PM

      Thanks Ms. FAF! Your kind words and consistent readership is very appreciated! 😀

    • February 28, 2018 at 9:12 PM

      Spinoffs are great! I’ve done pretty well with them over the years, so I’m pretty positive about them. The various studies seem to agree with my results too.

  • February 28, 2018 at 9:26 AM

    I liked Greenblatt’s book. I made some money on the merger acquisitions deals. Warren Buffett calls them “workouts” and they are pretty low-risk. You do have to be fast though, as you said. Sometimes if the merger announcement comes out in a trade journal or business insider or something first and then the mainstream press a day or two later, you can still arbitrage. I just got tired of the urgency and the transaction costs.

    • February 28, 2018 at 9:09 PM

      Yeah, I don’t chase mergers myself. I’ve stumbled onto them a few times and done very well, but other special situations are far easier and returns are just as good!

  • February 28, 2018 at 4:25 PM

    Damn Tako, another great post! While I have little interest in pursuing any of these strategies because I’m a lazy index fund investor, it’s nice to learn about them and know what’s out there. Who knows if I’ll be as lazy 10 years from now.

    Thanks for the info!

    • February 28, 2018 at 9:08 PM

      Thanks Accidental FIRE. There is absolutely nothing wrong with being a lazy index investor! Hell, almost all of our money in tax advantaged accounts is all index funds!

      I just dabble for the extra credit!

  • February 28, 2018 at 6:32 PM

    Wow….20% of your portfolio invested in 2 special situations. That is conviction!

    Great sharing by the way!

    • February 28, 2018 at 9:06 PM

      Thanks SGdividends! I didn’t think 20% was much in the way of conviction. I thought it was a pretty wimpy position in fact! Anything less than 50% isn’t huge in my book. 😉

  • February 28, 2018 at 8:18 PM

    I’m also impressed by the 20% portfolio in the two special situations! Just like Charlie Munger- you are a patient investor, and when you go in, you go in big!
    GYM recently posted…Mazatlan on The Cheap

    • February 28, 2018 at 9:04 PM

      Really? 20% is big? I didn’t think so! 80% to 100% is real conviction in my book.

  • March 1, 2018 at 7:47 AM

    Hi Mr. Tako. First I want to say that I love your posts. I found your blog early January and I’ve gone through the majority of your posts. I am relatively new to the workforce and to investing (finished grad school last year). While so far I have been investing in index funds, I am interested in a more hands-on approach. To that end I am reading some of the books you have recommended.

    While I have many questions for you, I wanted to start by asking about DowDupont. Did you decide to invest based on the recent news about the spin offs? Or you were already invested?

    Thanks and keep up the good work!

    • March 2, 2018 at 1:14 AM

      I actually got interested in DWDP back when Third Point started investing. Third Point is another ‘activist bully’ that’s known for getting results. (This was back when the company was only Dow.) I agreed with Third Points investing thesis and believed there was room for considerable value enhancement.

      Then along came the merger and spinoff plan. It’s been quite the wild ride.

  • March 1, 2018 at 2:48 PM

    Yes Special Situations are the best way to get the most bang for your buck. Take Volkswagen(VLKAY) for example, the “diesel gate” lawsuits are almost all settled and thank god nobody died. The penalties are peanuts for a company like VLKAY. Stock should hit $50+ by year end or British Petroleum(BP) AKA as the British Government. The Gulf explosion is almost behind them and they are now a very profitable company, except this baby to also hit $50 by year end, if not, the 6% dividend is quite juicy!

    • March 2, 2018 at 1:10 AM

      Litigation is another great example of a special situation! Thanks for the great examples Dick.

  • March 1, 2018 at 2:51 PM

    Being in the right place at the right time is definitely a must for picking individual stocks. Thanks for the book recommendation–you’re right, the title sounds really scuzzy, but more information never hurts!

    • March 2, 2018 at 1:08 AM

      Despite the ridiculous title it’s actually a great book. Dare I say a classic?

      Just look at the incredibly positive reviews on Amazon if you don’t believe me. Don’t judge a book by its incredibly dumb title!


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