Investment Advisory Service

Sunday, 9 February 2014

Work Outs, Richard Zeckhauser & The Curious Case of Shree Rama Multi-Tech


Special situations [workouts involving mergers, de mergers, open offers and other similar corporate actions] occupy a very special place in my mind and my investing philosophy. Working on special sits for me is akin to forensic science. Looking for information, finding out clues and working out the case is like solving a murder case or finding out a lost artifact.

I have worked on such cases in the past and made a few good, a few poor and a large number of mediocre investment calls. I introspected and concluded that although the cases provided a lot of mental kick, they did not provide the commensurate financial returns. A lot of work-outs were illiquid, large amount of capital could not be deployed and returns were not good enough. In a nut shell, the return per unit of effort or time spent was not adequate.

Thus, I wrote the following 4 point checklist to weed away the poor or mediocre situations and concentrate only on the ones which are promising.
  1. Downside protection. The work out should provide immense downside protection. The odds of making 3 times the investment if I win and losing 100% of it if I lose, will not classify as a special sit. [All options would classify as special sits with this criteria]. I may invest my money with the above odds but I will not look at that situation as a workout.
  2. Liquid. The workout should be liquid enough to deploy/withdraw money in a reasonable period of time.
  3. Absolute Returns. The workout should have an expected absolute pay-off of atleast twice the bond yield. [minimum 15% absolute return in today's terms]
  4. Conviction to put atleast 10% of the portfolio. The work out should be so good that I get convinced to deploy atleast 10% of my portfolio.
Looking at my historical investment book and also analyzing the above filters over the last few months, I think that 95% of the potential corporate workouts would not pass one or more of the above criteria. A lot of time and mental energy would thus be saved by simply avoiding those situations and concentrating on the good ones [or waiting for the loose balls in cricket parlance].

Prof. Sanjay Bakshi shared a paper titled : "Investing in the Unknown and the Unknowable" written by Richard Zeckhauser. It's one of the most fascinating papers I have read and it opened my mind to the world of great investment possibilities. You can find the paper here. The paper runs into 41 pages but the first few pages contain most of the ideas. If after reading some pages, you start hallucinating like Darsheel Safary of Taare Zameen Par, you can put the paper to rest without missing a lot of action.

Scanning the corporate announcements a few days back, I came across the open offer of Shree Rama Multi-Tech Limited. The offer was under litigation since 2005 and was recently cleared by SEBI after a decision by the Supreme Court. The offer price was 18.60 and the market price was 8.50. I read about the situation and formulated my thoughts in this document.

I think the situation was similar to "Head I win, Tails I don't lose much" strategy propounded by Mohinsh Pabrai with some UU characteristics thrown in. I thoroughly enjoyed working on the case; whether it will lead to financial gains or not only time will tell.

Disclaimer : No recommendation to buy or sell the stocks discussed in the blog.






6 comments:

Anil Kumar Tulsiram said...

Hi Ankur

Very interesting post. Incidentally, I myself had almost the same rules for myself some type back, excluding liquidity and some difference in absolute return and portfolio allocation. In addition to three rules, I have set one more condition that in special situations like open offer, delisting etc market is very efficient in short term, specially after open offer opens and RBB starts in case of delisting. So, as a rule I do not take event risk and generally sell in the open market rather than surrendering shares to company in open offer and delisting.

Ankur Jain said...

Hi Anil,

Thanks for your comment.

While, most of the times it makes sense to not take the event risk; sometimes it may make perfect sense to participate in the event. If I understand the risks and the probable downside and if it makes sense, I don't mind participating in the event.


Regards

Ankur


Alok Lodha said...

Very Well explained .

Ankur Jain said...


Thanks Alok.

Manish Dhawan said...

It seems u ended with a marginal loss on this 1. cmp @Rs3 and acceptance of 35%.

Ankur Jain said...


Acceptance ratio was 36.35%; lower than what I expected. Trade ended with a small profit of 2-3%.