Benjamin Graham's Special Situations or "Workouts"

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Special Situations are advanced strategies that Benjamin Graham — Warren Buffett's mentor — recommended for professional investors.

Types

For professional investors, Graham described the following types of Special Situations or Workouts.

“There is also a fairly wide group of “special situations,” which over many years could be counted on to bring a nice annual return of 20% or better, with a minimum of overall risk to those who knew their way around in this field. They include intersecurity arbitrages, payouts or workouts in liquidations, protected hedges of certain kinds. The most typical case is a projected merger or acquisition which offers a substantially higher value for certain shares than their price on the date of the announcement.”

Benjamin Graham, Chapter 1: Investment versus Speculation, The Intelligent Investor

Buffett and DCF

Special Situations require more than the average level of ability and experience. Graham's more famous students — such as Warren Buffett — would therefore be more apt to use Special Situations for their own operations, which has possibly given rise to the myth that Buffett no longer follows Graham, or that Buffett now uses DCF.

Buffett: Fisher, Munger and Graham

At the 1997 Berkshire Hathaway Annual Shareholders Meeting, Buffett describes how he graduated from Graham's basic framework into Special Situations and how Phil Fisher and Charlie Munger contributed to the change.

Peter Lynch

In the following video, Lynch explains why the professionals no longer have the structural edge they once did, and the advantage is now more psychological.

"The data now is so good. I remember waiting for the mail to come to our library to check Nike's annual report... So theoretically the individual's edge has improved in the last 20, 30 years versus the professional. The problem is people have so many biases."

Peter Lynch, Fidelity Investments: Lessons from an investing legend (2019).

要約する
Special Situations are advanced investment strategies recommended by Benjamin Graham, mentor to Warren Buffett, aimed at professional investors. Graham identified various types of Special Situations, including intersecurity arbitrages and mergers, which historically could yield annual returns of 20% or more with minimal risk. These strategies require a higher level of skill and experience, making them more suitable for seasoned investors like Buffett, who evolved from Graham's foundational principles into more complex strategies. At the 1997 Berkshire Hathaway Annual Shareholders Meeting, Buffett acknowledged the influence of Phil Fisher and Charlie Munger on his investment approach. Additionally, Peter Lynch noted that while individual investors now have access to superior data compared to the past, psychological biases can hinder their performance. This shift highlights the changing landscape of investing, where the edge once held by professionals has diminished, emphasizing the importance of understanding behavioral finance in today's market.