This chapter contains of a plethora of value investing examples. Klarman details a number of securities where investors who paid attention to fundamentals (e.g. strong businesses masked by unprofitable divisions, or companies trading at discounts to cash etc.) reaped enormous profits.
Klarman believes that investors should look for potential catalysts when making investment decisions. Catalysts are events that cause a stock
’s value to be recognized, thus resulting in immediate returns to investors who purchased at a discount. A liquidation
is an example of a catalyst, and examples are given where such events have returned generous – and quick – positive results for investors (e.g. during bankruptcy events, where securities generally
trade at a discount to their recoverable values).
Share buybacks and asset sales also represent partial catalysts, as they can cause a stock to inch close
r to its underlying
value. More importantly to Klarman, such events signal
that management is interested in returning value to shareholder
s, which bodes well for the future.
Some areas where Klarman believes value investors can indeed find value include: liquidations, complex securities (i.e. securities institutions can’t purchase because they don’t fit set categories), rights offer
ings (often offering prices low
er than current market value), spinoffs (as they are usually sold by holders of the parents, thus depressing prices immediately) and risk arbitrage
(depending on the market’s mood, as sometimes the market’s exuberance can erode returns).