How I Made a Killing in the Stock Market
I’d like to start by telling you a story about a killing I made in the stock market many years ago involving a very cool risk arbitrage operation. By 2001, I had accumulated six years of experience in risk arbitrage with very satisfactory overall results because the arb spreads were very good as the competition was low.
So, in December 2001 this company announced a buyback at Rs 250 per share. I bought the stock at Rs 215, held it for about 40 days and then just prior to the tender offer, I sold it for Rs 240, netting a gain of Rs 25 on an investment of Rs 215. That’s a flat return of about 12% and an IRR of about 110%. Not bad at all!
Nomad Investment Partnership: Keep An Eye On The Unseen Risks
There are many ways to define risk. Warren Buffett has said that "risk comes from not knowing what you're doing." Q3 2020 hedge fund letters, conferences and more His mentor, Benjamin Graham, believed that risk should be measured as the chance of a permanent capital impairment of an investment. Seth Klarman also holds this view. Read More
What was the name of the company? Gee, I wish I could get away without telling you my trade secrets but I confessed today morning that I will tell you everything. The name of that company was MICO. Now, it’s called Bosch.
Some of the dumbest things I have done have produced very high IRRs.
Let me now tell you about another fascinating experience with Graham’s low-priced common stocks theme.
Low-Priced Common Stocks
This is another one very cool Graham and Dodd strategy that works during severe bear markets. It really does.
Graham called it the “low-priced-common stock” strategy which involved selectively buying shares of companies selling at absolute low price (so called penny stocks) during severe bear markets and holding them for a few years. He cautioned investors against the typical penny stocks of dubious companies which were “pushed” by intermediaries who were incentivised by fat commissions. He wrote such penny stocks were not genuine at all and their pseudo-low prices were
“accomplished by the simple arti?ce of creating so large a number of shares that even at a few dollars per share the total value of the common issue is excessive.”
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