Home Book Reviews Maurece Schiller’s Fortunes In Special Situations In The Stock Market

Maurece Schiller’s Fortunes In Special Situations In The Stock Market

Tom Jacobs recently published Maurece Schiller’s Fortunes in Special Situations in the Stock Market: The Authorized Edition. We provided an endorsement and the following foreword:

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Beginning with Maurece Schiller’s series is the original and definitive guide to special situation investing. It is not an embellishment to say it stands shoulder-to-shoulder with the three other great works in the value investing canon—Graham-and-Dodd’s Security Analysis, Benjamin Graham’s The Intelligent Investor and Phil Fisher’s Common Stocks and Uncommon Profits. Incomplete, and thought partially lost for decades, investment advisor and author Tom Jacobs has rediscovered the full set, arranging Schiller’s original work alongside fascinating biographical detail on the man.

Special situation investing remains a mystery to many. What are special situations? They are now as they were in Schiller’s time: corporate event-driven opportunities. They take many forms, but each possesses three defining characteristics: First, the return on investment depends on a corporate act— board-level action like a merger, takeover, liquidation, spin-off, or similar—rather than an improvement in the underlying business. Second, the return on investment can be calculated with something approaching mathematical certainty. When combined with a known timeline, this calculation can be converted into an annualized figure. Third, the security must be undervalued. This reduces the risk and produces the opportunity type most highly prized by professional investors—asymmetric returns, meaning low or no downside, and a higher, surer upside.

The implication, and the main attraction to special situations, is that the return doesn’t depend on the direction of the stock market. This is the reason its practitioners love the art. A special situation turns on the execution of the corporate event, not on whether the stock market goes up or down. The vagaries of the stock market create the mispricings that lead to the opportunities, but the special situations method is only incidentally “stock market” investing.

Two of the world’s best-known value investors—Warren Buffett, and Joel Greenblatt—recorded their highest returns in special situations. Buffett averaged 29.5 percent per year in his twelve years from 1956 to 1969 as general partner of the Buffett Partnerships. And Greenblatt averaged 40 percent per year from 1985 to 2005 in his Gotham Capital. Both records were achieved as special situations investors. Only too much capital—the best kind of problem—stopped them from persisting.

The essence of special situation investing is curiosity—a willingness to look beyond stock screens and turn over rocks, pull on loose threads and unearth rich veins below the surface. It demands only a little knowledge, but a lot of shoe leather, elbow grease, and midnight oil. This is why Schiller was rare, and why practitioners are rarer still today. But for those small tolls, its rewards are incommensurately greater.

As fellow special situations practitioners, we are delighted to present the classic masterworks, and to see Schiller restored to his rightful place among the investing luminaries. Maurece Schiller’s books are a towering contribution to the value investing literature. No serious value investor’s library is complete without the set.

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”