Benjamin Graham on Special Situations

Benjamin Graham on Special Situations

Benjamin Graham gives a clear definition of what he considers a special situation. Below is a quote from Graham:

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First, just what is meant by a “special situation”?Convention has not jelled sufficiently to permit a clear-cut and final definition.In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance.In the narrow sense, you do not have a real “special situation” unless the particular development is already under way.


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This distinction is readily apparent by reference to the wide fields of bankrupt corporations and preferred stocks with large back dividends.In the former case, “the particular development” would be reorganization; in the latter, it would be discharge of the arrears, usually by a recapitalization. Many practitioners will say that a company in trusteeship does not constitute a special situation until a reorganization plan has actually been submitted; similarly, there must be a definite plan on foot for taking care of dividend accumulations.Thus, American Woolen Preferred may have had interesting possibilities for years because of its very large back dividends, but it became a true special situation only when the buyer knew that a plan of repayment had been or was soon to be announced.

There is a logical and important reason for favoring this narrower definition of a special situation. By doing so we are able to conceive of these commitments in terms of an expected annual return on the investment.As will be seen, such a calculation involves quite a number of estimates in each case, and thus the final figure bears little resemblance to the bond yields taken out of a basis book. Nevertheless, this technique is valuable as a guide to the operator in special situations, and it gives him an entirely different attitude toward his holdings than that of the trader, speculator or ordinary investor

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