No risk, high reward?
Is that even possible?
I would like you to see this blog as a real-life application of everything we read in those wonderful investment books. Not only do I want to mention real-life examples, but I want to make them current, things you can actually apply for today, that make it incredibly harder to write about but I’m up to the challenge.
Yesterday I posted about Oroco and referred to it as a “special situation”. (by the way, that article is close to 1000 views, if you missed it click here)
Here is a great example of another kind of “special situation”, a merger. This real-life example happened yesterday.
$ATVI "Microsoft will acquire Activision Blizzard for $95.00 per share, in an all-cash transaction"
Today’s price? $82.31. That’s a 12.69% return for waiting until the deal closes. Needless to say, the buyer has the money.
A special situation is a one-time event that has an impact on a stock or other asset.
“The essence of a special situation is an expected corporate (not market) development, within a time period estimable in the light of past experience” – Behamin Graham
There is plenty out there to learn how to find these beauties, I personally suggest these books by Mary Buffett or Joel Greenblatt.
The reason these are good is that:
1) You have a limited time horizon, a specific date.
2) risk rewards tend to be better than normal trade.
However, as you know, any number of events, positive or negative, can cause a stock's price to pop or depress its price.
Mergers do have a risk of not closing. So in order to mitigate that risk, some people would buy the stock that is being acquired, and short the one that is acquiring the new company. At this point, it just gets too complicated for me and I tend to lose interest. I hate shorting anything.
In today’s example of Microsoft acquiring Activision, the deal could be blocked by some regulatory entity for example. And the price probably would go down again, however, this is unlikely… but possible.
If you are looking for almost no risk (there’s always risks) and high rewards here is a real-life example that you could apply today: arbitrage
Arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from tiny differences in the asset's listed price. - Investopedia
Arbitrage is another kind of special situation with virtually no risk. They tend to have short life spans and limited upside too, so when you see them grab them!
Those are my favorite ones.
Let me give you a real live example, that could be applied today.
2 weeks ago New York legalized online sports gambling, with Arizona, Colorado, Connecticut, Illinois, Indiana, Iowa, Louisiana, Michigan, New Jersey, Pennsylvania, Tennessee, Virginia, and West Virginia.
To gain this market fours companies are launching promotions like
1. FanDuel - offers you a risk-free first bet of up to $1,000
2. Caesars - will credit your account with $300 when you open a new account and match your first deposit up to $3,000 if you enter the code CZRNEW
3. BetRivers - match your first $250 if you use the code 250MATCH
4. DraftKings - "Free bet up to $5,000"
Let’s make this simple. You decide to open an account in FanDuel with $1000 and Caesars with another $1000.
So now your accounts look like this:
Fan Duel - $1000. Replaced if you lose. You bet it all
Caesars - $2300. You bet only $1000
Now the arbitrage, you will bet for one team in one platform, and for the rival in the second platform, of course in the same game.
Let’s say you bet in Fan Duel against the favorite team, and in Caesar FOR the favorite team.
Scenario 1. Your team wins:
Fan Duel - $1000. Replaced by the company after you lost
Caesars - $3200.
For a total of $4200, on your initial $2000 investment.
Scenario2. your team loses:
Fan Duel - $1900
Caesars - $2200.
For a total of $4100, on your initial $2000 investment.
Almost no-risk, and high return. Did you calculate that annualized return on investment?
Too good to be true?
Well, that’s exactly what former hedge fund manager Whitney Tilson (picture below) did a couple of days ago. You can see his post here, here, and here.
The sad part is that you can only do this if you are in one of those states physically. I tried doing it with VPNs for a couple of hours and it didn't work, they ask you to download an app to double-check your location. But if you happen to know someone around those states don’t forget to send them this post. They will have more than enough money to register for my paid newsletter to get amazing public companies trading at discounts and then some!
Until the next time! don’t forget to share!