Book Review: Special Situations Investing by Brian Stark

Special Situation Investing by Brian Stark

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This is a special, out-of-print book that is high on both our lists.  Because it is little known we thought we would write up here for people to see. It is a great companion to the books by Maurece Shiller.

The book dives in deep on three types of special situations: hedging, liquidations, and warrant hedging.  Liquidations are covered well in Shiller’s book so I thought I would focus on the less covered idea in the book, which is warrant hedging.

Warrant hedging is a really neat idea and it is not talked about nearly as much as something like long equity with sustainable moats.  Another famous name on the list of warrant hedgers is Ed Thorp, who we hope to cover in more detail later.

The main idea of warrant hedging is simple. The price of a warrant has two components. The first is the conversion value, if any, that comes from the difference in the strike price of the warrant and the price of the underlying security.  The other part is a time value.  Even an out-of-the-money warrant is worth something because it may trade above its strike price in the future.  The idea is to capture of the time value during the run off of the warrant at the end of its life through selling short warrants close to expiration and purchasing the underlying stock.

Warrant hedging is a feature we are going to be building out under our trackers in the near future under Investment Resources.

The entire book is a great read. I know it is pricey- but there is a reason! People who have read the book tend to be big fans and won’t give up their book (I know I won’t)!

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