YouSaid · the spoken record

Roger Fan

lines on the record: 63
first: 2024-11-22
most recent: 2024-11-22
sittings or episodes: 1
sources: podcast

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“Same. It was fantastic chatting with you about Joel Greenblatt's special situations and just the value investing in general. So thanks again. It was a pleasure.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so my website rfitalmanagement.com is the best way to get in contact. You can fill out the form submission box and we can connect that way. We also post our recent investor letters, interviews, media appearances like this one. So everything will be linked to that website. So it's the best way. I'm also on X and I'll post that often, but I am on X. My handle is RGR F-A-N. I'm also on LinkedIn. You can just search Roger Fan. I'm there. And I think in the coming months I'll also be publishing on SubStack. So we'll be posting research notes and also blog posts pertaining to investment approaches and philosophies, et cetera. And so I'll definitely link those blog posts through the website X and LinkedIn.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Holdings, those are situations where we can't take a 5% plus position, right? And so, because of the elevated risk. And so that'll be like a leap or a call option. It could be a short, it could be a risk guard position, just situations where you can't go past 5%, especially when it comes to shorts and also options.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I believe every word he says about concentration. So at RF Capital, we typically have five to ten core holdings, and we size up on our positions. And so our starter position is typically a 5% minimal position, and then 10% is baseline. And with more conviction and or favorable price action, we'll take it up to 15 or 20%. And generally, we don't really like having positions be more than 20 or 25% at cost, but I'm willing to do it if the downside is absolutely protected. Haven't done a 40% position like Joel Greenblatt did, but perhaps someday if I see a situation. So what we do really matches up with what he says about five to eight investments making up 80% of the portfolio. Our top five or ten definitely the first 80% of the portfolio and the rest is cash special situations and maybe shorts. And the smaller positions that we have outside of those five or ten core”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Or things are sold off and you unmask the value of the good business, those situations can also provide excellent returns.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Have very explosive returns. But you know, the thing with post bankruptcy exits is that bankruptcies in general are driven by where we are in the economic cycle. And so they may not always be available to you. However, you can find a situation like Kmart every once in a while, right? Or Toys R Us, for example. Toys R Us actually is no longer around, right? But that was also a spinoff and it was 100x. So you just have a bunch of post-bankruptcy exits that just did phenomenally well. Obviously for every Kmart and Toys R Us, you'll have a complete bust. But that's why you have to pick your spots and concentrate, as Joel Greenbaud advocates. And one thing we didn't talk about as much, but restructurings and divestitures, those are actually pretty interesting as well because they're always happening. Companies are always looking to restructure. They're always looking to sell off assets.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“So they're actually all interesting, but it depends on the opportunity set and it depends on which looks most attractive at the time. So the easy answer is I really like spin-offs because there's always a consistent calendar of those happening. And I really like Riskarb and tender offers. But the problem I have with those, and I think you alluded to it as well, is that you can't take large positions in the portfolio. I mean, you would be an idiot if you sized your risk arb trade at 10 or 20 percent of your portfolio because that deal could very much blow up in your face. But I always keep going back there if I have cash position. And going back to the merger securities, those aren't always available. Cash and stock are usually a typical forms of payment. But if there are merger securities out there, and I like the situation, I would be happy to put on a sizable position in those as well. Post-bankruptcy equities are definitely interesting as I just talked about Kmart. You can potentially”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“And claims and bank debt and stuff like that. But the post bankruptcy equity here, the stock went from $15 to $109, $15 to $109. That's a 7x in a matter of 18 months. So if you annualize that out, that's a 229% return. So what I got from this was even if you aren't Eddie Lampert and you don't have billions of assets under management and an army of lawyers at your disposal, you can still win. You could have profited very handsomely just by buying Kmart stock straight out of bankruptcy. And you would have your $230% return.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Situation. The business and the assets were left for dead. And so here's why that valuation is completely wrong. And it was not just wrong, but it was just way off the reservation. So if you just use 2004 as an example, when they made transactions and they sold their existing stores, if you use those comps and those transactions to value Kmart's portfolio, that portfolio is actually worth something like $18 billion. $18 billion with a B. versus what I just said, $10 million, $5 million. It was just one of the most mispriced situations that I've ever seen. And so I guess the lesson is take large positions in various classes of debt and use that influence and size to influence the outcome of the bankruptcy process. So how did this work out? Kmart emerged from bankruptcy in May of 2003, but get this. It seems like you can make a lot of money in, you know, secured and unsecured.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“They were ridiculous, right? But the estimated value of Kmarth, they were saying it was worth $2.2 to $3 billion, right? Using comp analysis and DCFs. And so basically they were saying that Kmart was worth maybe $875 a share to $17.50 to share thereabouts. But the valuation is completely wrong. I mean, if you just use common sense, if you just actually look at the filings, they use discount rates of 20 to 25%. 20 to 25% is quite excessive. It's a bit high for my tastes, right? Especially if you're trying to pinpoint the exact valuation of a business. And they value the PP&E at just 10 million. 10 million. And I'll get to why that's such an egregious mispricing. And then the liquidation analysis was for something like 4.6 million. And they were saying that the SMAD recovery range was just 13 to 19%. So maybe none of that makes sense to the casual listener, but basically this was a classic misconception.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“$161 million in Trade Venture lease rejection claims and trust preferred obligations. So, all in all, the total investment, which was accumulated over time, $2.3 billion. And the third avenue was also involved. So Third Avenue, Marty Whitman, they're also very well regarded in the distressed debt and just value investing space. And so Marty also bought $99 million in pre-petition no claims and $79 million in Trade Venture lease rejection claims, and he was basically in support of what Eddie Lampert was doing. So he's got this big chunk of securities, right? What does he do during bankruptcy proceedings? He gets appointed as chairman and director of Kmart Edgy Lampert, and he also appoints six of the nine Kmart board members, and he also sat on the FIC, which is the Financial Institutions Committee. And so here's where it gets really interesting, right? Because it all comes down to mispricings and valuation. I have no idea how these bankers came up with these values because”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Ailaprin does. So, what he's doing is what we would call vulture investing. And so vulture investing is actually a form of activist investing. It's where you influence management, you gain control, you strategically purchase and hold significant percentages of various classes of outstanding debt. And just as an aside, it's probably best to buy probably more than a third of the claims in the class because the class is deemed to have accepted the plan if at least the majority of the claim holders and at least two-thirds vote for the plan. So you just want to buy as much as possible. And the overall goal, like all investing, is to exit by selling these securities at a higher price. But really how you really make money is by converting the debt that you own to cash in equity. So what does Eddie Lamper do? AD Lamper buys a bunch of claims, right? So let's go down the list. He bought 382 million of pre-petitioned lender claims, about 1.8 billion in pre-petitioned note claims.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“2004 were really good Joe Greenblatt type numbers 29% annualized so going back to the Kmart situation so leading up to it Q4 of 2001 right disappointing fourth quarter sales and earnings having some trouble in November of 2001 standard reports downgrades their debt to BB in December Moody's also downgrades their unsecured debt to junk status BA2 and then in January prudential downgrades them from whole to sell and you know like when an analyst downgrades you from whole to cell, you know something's in trouble because everything's a buy or a hold in the banking world. And so if you get downgrades to a cell, there's something seriously wrong. Right. And so in January, they're unable to come up with money for surety bonds, you know, things start to go sideways. They're unable to pay Fleming, for example, which was their major food distributor and grocery wholesale at the time and they file for Chapter 11 bankruptcy, right? So let's get into it.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Touted as the next Warren Buffett, but you know, here's this guy, you know, and he's got a pristine resume, right? Yale graduate, Sumu Cum Laude. He goes on to work at the Risk Arb desk at Goldman Sachs. So he worked for Robert Rubin. And the who's who of the finance world went through the Risk Arb desk, and they all went on to start famous hedge funds, right? And so when he was relatively young, like, I think in his early 20s or late 20s, not even 30, right? He was backed by Richard Rainwater, who was also a very probably one of the best investors of all time as well, Richard Rainwater. But he backed Eddie Lampert with 28 million, and so he started ESL investments in 1988. And so, you know, this hedge fund, you know, Eddie Lanford, my goodness, if you look at his roster of investors, you know, he invests for David Geffin, Michael Dell, George Soros, the Ziff Brothers, the Tish family. I mean, you name it. You know, just all-star roster, right? And this AUM got to as high as $16 billion or something like that in 2006. And his returns up until around”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Night too, they diversified. They got into Walden Book Company, home centers of America, sports authority, office max, and borders. So basically stuff that's not their core competence. And so what ended up happening, as you can imagine, they had to start selling these non-core assets and they had to close over 200 stores between 1994 and 1995. But even after they did all that, they still required 5 billion in refinancing. And so in today's dollars, that's 10 billion. I mean, that's a sizable chunk of change. So, you know, as you said, Kmart declared bankruptcy in 2002. And a lot of that was because they faced stiff competition from Walmart and Target. And Amazon at the time was on the rise in e-commerce, not where they are today, but they were still a player. And so incomes Ediolampert. So Eddie Lampert was touted as the next to Warren Buffett. And I swear, this is like a Warren Buffett curse. You never want to be”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Possible because the last Kmart standing is actually in Miami, like the very last one, and it's not even a full-size store. And there are four other ones in U.S. territories, I believe one in Guam and three in the Virgin Islands. So the reason why people may not have heard about Kmart, it's the younger folks. Kmart at its peak had around 2,500 stores. So Kmart, they were massive. They were the retailer. So just going back, big picture, Spash and Kresky and John McCory, they formed a partnership in 1897 to open five and dime stores, so discount stores. But this partnership dissolved in 1912, and the SS Kresky company was formed, right? And so the first Kmart opened in 1962. And because 95% of sales came from Kmart in 1977, they changed the name to Kmart Corporation. But going back to cycles, Kmart was doing very well. So between 1984 and 1948,”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so you mentioned school, so this deal actually has a special place in my heart. So I took advanced bankruptcy in law school, and it was just one of my favorite classes during my time there. And it makes sense. I'm an investor, special situations. It all makes sense. So I actually used this case study. But at the time, not just, oh, I want to get an A in the class, but it was mostly just to learn more about the stress debt investing given my interest. But I also really liked Eddie Lampert's story, his track record, and just his concentrated investment style. And so I ended up using Kmart as the case study. And lo and behold, I actually got the top grade in the class. But it was actually kind of a shocker because get this. My professor was actually on the Kmart case when she was a partner at Scat and Arps. And so for me, it was like, I was getting the stamp of approval from an expert who actually lived the situation in real time. So some background for people who don't even know what Kmart is, which is actually”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Where value can actually be realized because there are a lot of companies, for example, like we're not talking about D value here, but net nets. There's a reason why net nets stay net nets. It's because they're just typically bad businesses in average to below average industries that don't do anything spectacular. And that's why they stay in net net territory. And for people who don't know what net debts are, they're basically companies trading at liquidation value or thereabouts.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Forms, right? It could be a new product or service, it could be a management change, you know, CEO, CFO, you replace them, somebody really good comes in. Maybe they're doing restructuring, they're doing asset sales, maybe they're buying and acquiring companies, maybe they've got new contracts, just anything that's on the horizon over the next one, two, three years. And then once you've got the press releases out, you probably have improved operating performance, that will get the attention of investors. And it also helps to have a strong balance sheet. So ideally, you have a lot of cash and you have minimal to no debt. Why? Because if you have a strong balance sheet, you also become a prime takeover candidate. If you're a buyout firm, you would rather take over companies that have a very clean balance sheet. And so these are ways that you can get around the melting ice cube issue, right? There just needs to be something that's going to happen over the next two to three years.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“So, I think this is a problem that most, if not all, value investors struggle with. You've got the melting ice cube, you've got a business in the secular decline, but valuation makes sense and it's at a low multiple. And so I would take the green blot approach and these types of businesses, you have to take more of a trading mentality than a, you know, it's going to be a five, 10 year, forever type investment, right? It's like more of a two to three year investment, but you're thinking, hey, maybe if things go south, I'm out. So you can't get into these types of investments and say, I will hold it for a decade or it's going to be a buy and hold forever like Warren Buffett would. Keep in mind, when Buffett says buy and hold forever, that's for the highest quality businesses out there, right? If you're talking about these types of businesses, not so much. And so that's why it's actually best to identify catalysts because catalysts will get the attention of market participants. And catalysts can come in different ways.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“You're really just making the game more complicated than it should be, and it's just a difficult judgment call to make. You're looking at bad businesses, at levered businesses, buffet's got that too hard pile. I would put post-bankruptcy exits that fall in those categories in the too hard pile. But talking about host, maybe you gotta look sometimes.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Operational issue within the business, and they couldn't pay the debt because if you have debt, you have to service that debt, you have to make the payments. And maybe they couldn't make the payments. And so they had to file bankruptcy to handle that issue. Another interesting reason why a good business could end up in bankruptcy is there are product liability lawsuits, for example. So maybe the product liability lawsuit was really bad and they felt that, oh, you know, we were probably going to lose this or the outcome is such that the verdict, the amount, is not something that we can pay.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“To go to law school, and you don't need to be a vulture investor to do well with post bankruptcy exits. And so with that being said, it's still a very tricky area. And so the best way is to be extremely selective because companies followed bankruptcy for a reason. Right. There's a reason why they got there in the first place. So one way to approach post-bankruptcy exits is to just invest in the good businesses. And so you might be wondering how is a good business even possible if they're a post-bankruptcy exit. Well, there are a few things that could have happened actually. The first is they may have been over leveraged due to a takeover that they did or via an LBO. And so they just made a bad decision with an acquisition and they overpaid and they didn't get the financing right. They took on too much debt. The second is that they had a short-term operating or performance issue. So maybe they missed a quarter or two or maybe they had a bad year or they actually had a”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“You're absolutely right. So, private investors and small funds in general should steer clear of companies in bankruptcy or those that are about to file for bankruptcy. Because first of all, when a company is in those stages, vulture investors and distressed head funds, they're going to have an advantage over you due to the sheer size as well as their legal expertise. So you're already at a disadvantage from the get-go. You see the situation, but there are professions out there that is their domain. And so you're already at a huge disadvantage. And so what Greenblatt recommends and what I recommend is to analyze post-bankruptcy exits instead. Post-bankruptcy exits are easy to understand because all the toxic waste has been dealt with, right? And you've got a disclosure statement. And once they exit bankruptcy, you just left analyzing the common stock again. Like most special situations, you just really looking at the common stock to start with. And so it's a much easier analysis. And you don't need”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“That's a good question. So, I think a lot of the times these spreads exist because there is the element of the deal not closing. And so in an efficient market, the shares should have traded the 34 on the day of announcement. But from the day of announcement to the close, a lot of things can happen. And so for whatever reason, market participants as a whole thought that the tender offered might not have been completed. And there was a threshold. I believe the threshold was something like 90% or something like that. And so there was a threshold that they had to reach for the tender offer and the whole deal to be completed. And so it's kind of like a Joel Green blesses in general. He doesn't know why businesses are undervalued. He doesn't know why he sees situations like host. These situations in general, why they exist. All he knows is that they exist. And if you do the work, you do the valuation work and there is a gap to intrinsic value and you put on the trade in size.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“So 15.7% to put in a deal just to end for you just to sit and wait for five months. And presumably this portion of your portfolio was in cash anyway. So all in all, it worked out really well.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Sense. So, you know, that's pretty decent, and the return on the asset capital was over 15. So, you know, you have the good and cheap aspects of And so basically, my thinking was there are worse businesses to be stuck with if the tender offer doesn't go through. So how did it work out? Pretty well. It took only five months from the initial buy to the close. They actually completed the delisting on October 15th. And so assuming you bought in May, you know, for 32 bucks and you could have gotten it for less than $32.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Thanksgiving, all that's going on in the Chinese and Hong Kong market. Anyway, for all intents and purposes, it looked like a slam dunk. Everything was in place. And so the downside is, of course, the deal not going through. But of course, tender offers tend to go through more often than not. It's not a sure thing, but it's definitely not a risk-arp situation where you have potentially an antitrust issue or a regulatory issue, etc. So in my mind, the worst case scenario was that I will be stuck with an average to above average business, but a business with a recognizable brand that was trading for about 15 times EVEDA and about 70 times EV EBIT. And so while I would like to play lower multiples in the M&A world, just multiples in general encompassing all types of businesses across all industries, those multiples are fine. And the business was also generating free cash flow and the revenue cater for the last three years was 18%.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“That part of the equation was pretty much solved. And in terms of financing, no issues there. The CFI, they raised 2 billion euro to buy out the minority shareholders via the steel. And so 1.6 billion came from Blackstone and Goldman Sachs. And the other 400 million came from the CACIB. In my mind, the financing aspect is also pretty secure. I mean, if it's coming from Blackstone and Goldman Sachs, they've got the financing done. And so why did he want to get this deal done? And the motivation for getting deals done is actually very important, both in this situation and also for any risk guard deal. And so they just made a bad decision with an acquisition and they overpaid and, you know, they didn't get the financing right. They took on too much debt. But that doesn't mean they're a bad business. They just mean that bad strategic move. And so that could be one reason. And they actually decided that the Hong Sang Index was down like 45% over the past five years and also down 46% from its peak in 2021. And it makes sense.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“You're looking at a double digit return, especially if it closes in three months or six months, right? So 6% becomes a double-digit return. And so depending on your analysis, if it's relatively safe and you don't think the deal is going to fall through, it gives your portfolio something to do rather than have it sit in cash, which as you know, cash does nothing and it's a better alternative to treasuries because treasuries, depending on what duration you bought for, it could be like a five percent yield or something. So if you're getting a double digit return, you know, the opportunity cost is obviously better if you invest in this situation. Raynal Gagert, he was the chairman of La Satan, and he's also a billionaire, actually, but he owned about 73% of the shares. And so he was the majority owner. And so it's safe to say, and just with common sense, if you're the majority owner and you're pushing for this, it's likely that the deal is going through, right? Unless you just have second thoughts and you just back out of the deal.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“If you have a friend, a colleague, a girlfriend, or a wife, you've probably bought something from there as a gift. And so I think one of their most popular products is like a hand cream and they've got it, you know, this formulated down to the tea and it's supposed to just work really well. But you got lotions, you have creams, oils, all kinds of beauty and cosmetic products. So the article went on to say how they were going to take the company private and they wanted to conduct a tender offer to buy back all the outstanding shares. And so the offer was for $34 per share Hong Kong. And so let's just use $32 as the example because you can actually buy it for a little bit below $32 and also obviously a bit above 32 at the time that this occurred. And so you're saying, okay, a $2 spread. It's not a lot, right? It's like a 6.25% return or something quote unquote paltry like that. But if you annualize it out based on when you buy it to the closing date”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“So, I first read about this in the Financial Times, and more specifically, it was the Lex column. And I know people don't really read newspapers these days, but I still find reading newspapers to be a great way of generating ideas. It can be the Financial Times, it could be the Wall Street Journal. But in this case, it was the Lex column. And for those who don't know, the Lex column is just column in the back of the paper that has little stock pitches. And Michael Price once quipped that he could run a fund just based on the Lex column alone. So that gives you an idea of the quality of companies that are written about in the Lex column. And so just the first thing that jumped out was I was actually familiar with Loxaton. And so they're in LA here and they're in all the malls. They're in all the outlets and they're just everywhere, right? The company operates in 90 countries worldwide and they have more than 3,000 retail outlets and over 1,300 stores, I believe.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“The spinoffs and all the other types of special situations when people get securities that they weren't anticipating or they don't want or that doesn't fall within their mandate, they're just going to sell it. So imagine you own the stock in the acquiring company all of a sudden the deal closes and you've got say preferreds. Maybe you're an unsophisticated investor. You don't even know what preferreds are. Right. It's just automatic. And so just going back to the overall opportunity, it's definitely there, but you have to look. And especially with mortgage securities, because the Wall Street Journal, the Financial Times and New York Times, whatever is your publication of choice, they're not going to feature merger securities because it's so boring. Nobody's going to talk about those things. And so you have to follow the deals and stay on top of the information because eventually they'll disclose, hey, you know, we're adding this in or we're throwing this into the deal structure.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Literally fell into a sinkhole. And so, how could you possibly anticipate something falling through a sinkhole when you're doing your risk-arb calculation on the spread and you're reading all these public filings and cord documents and whatnot? You're not going to think about a sinkhole. It's just way out in left field, but you have to account for that. And so for that reason, that's why Joel Greenblatt actually recommends merger securities over risk arbitrage. And merger securities are, well, first it's just a safer way to make money than risk garb. And so what merger securities are, it's forms of payment that get in on deals. And so typically deals are done, right? The acquirer is making a deal for the target and the payment is typically cash and or stock. It's typically not preferred or warrants or bonds, right? It's typically just cash and or stock. So it goes back to the whole dynamics of”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“This virtuous cycle that keeps going and MA is at the center of it all. And so it's like the Lion King, the circle of life. That's just how the markets and companies operate. However, I will say that it's gotten very difficult over the years because of increased competition. There are a lot of funds doing risk arb. Spreads have come down as well. You know, it's not the heyday of the 70s and 80s where you could just make a killing and risk arbitrage. It's different now. And there are risks, as you mentioned, and the risks, as you touched upon, include antitrust risk, financing risk, and you've also got the whole position sizing on the portfolio management side of things. And just in recent years, for example, the government has gotten very involved in some very high-profile situations involving antitrust issues. And so if that deal falls through and you size the too big, you're going to lose a lot of money. And you alluded to the situation with Joel Greenblatt. I mean, that profit.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so just as an opportunity set, there will always be investment opportunities in this area. And, you know, if you just follow the papers, the Wall Street Journal, the Financial Times, whatever it may be, there's always M&A activity going on. And that's because risk arbitrage, you know, M&A, it's really what keeps the grease going. It keeps the entire cycle going. And what I mean by cycle is it's just on a big picture level, you know, you have a cheap company. That cheap company gets acquired in the M&A deal. And then the company and our industry gets overheated. Everything's great. And then you have a bankruptcy. So after the bankruptcy gets done, there's a cheap company again. That cheap company gets bought in an M&A deal and then it repeats itself again, right? Cycles great. Maybe it's in a commodity business. It gets to the peak. You got a bunch of debt going on. Bankruptcy. Exits bankruptcy becomes a cheap stock again. And so it's”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Having aversion to that, but it's a great reminder to myself to wade through the documents and take a look. Don't let the leverage and the debt dissuade you from investing because then you're going to miss out on a triple in four months.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“And call options. And I think he must have involved the Kamisak in this because, you know, if you're putting 40% of your fund in something, it's not going to be all an options, right? And so the other thing I take away from this is that that's what you analyze all the securities that are available to you after you analyze the situation. So when you've done your work on the situation, you don't just look at the common, you look at all the bonds that are trading, you look at all the prefers that are available, if they're available, you know, all the warrants, call options, et cetera. Can you just take a big picture of you and you just think to yourself, what is the best way to play this situation? And sometimes it's just a common stock. And so it's an easy investment, but sometimes maybe you do a Joel Greenblatt 40% type investment and you structure it around preferred and call options and the common. So this case study is just one of my favorites and it's fascinating because admittedly, if I see a lot of debt on the balance sheet like that, I also”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“What he saw was it was a situation where he couldn't really lose money, and so he sized it up to 40% because that was a situation where basically what he looks for when he puts together a 40% position is that he's looking for situations where he can't lose money. I think most investors get it wrong and they flip it the other way. They're looking for situations where they can make a lot of money. Well, the problem is, if you got a 40% position and the situation doesn't work out because you improperly evaluated the downside and all the risks, you're actually going to have a very bad year. And so long story short, the investment worked out very well. But I will note that he made it sound a lot simpler than it actually was. And so the execution of the trade was actually quite complicated. And so the way he structured the investment in host actually involved preferred shares.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Worked out extremely well. He tripled his money within four months. So you do the annualized return on that. It was a huge return for his portfolio and his firm Gotham because he actually put almost 40% of the fund assets into host. So just imagine, you know, a private investor's $1 million portfolio. Or if you were managing $30 billion, I mean 40% of the portfolio in this situation. But the way he'll rationalize it is that his downside was protected. Basically, he was just paying $4 for the debt-free assets. And he valued those assets conservatively at about $6, so $6 for, so you're getting about, you know, like a 33% margin of safety. And everything else was essentially a free option. So the subsidiary that was doing terribly, if that worked out, free option. If the unsellable hotels, they could be sold or monetized in some way. It's a free option.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Heavily invested in what was quote unquote the toxic waste. So if you combine these two things together, the Merrier families in it, this turnaround specialist or just this guy who's really good at financial engineering, whatever his skill set was that made himself successful, these two were on the same boat as shareholders. And so insider participation, super important.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. So insider participation actually is the most important aspect. And he'll say that it's actually the first place that he looks when he dives into the public documents. So it's not, oh, you know, look at the numbers or whatever else that people like to look at. He actually goes straight to that section of the public document and he wants to know what this insider participation looked like because the more stock is centered for new management, the better. And so in this situation, Ballenbach was the guy that was going to run it. And this guy, you know, he's got a reputation, as we all do to maintain. So you're not going to want to be the CEO of a entity or company that's destined for failure, right? You don't want to jump on a sinking ship. And so I think if you looked at public documents, this backed out because nearly 20% of the”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“And so that's what they want. Host Marriott was the toxic waste with the unsalvable hotels and the $2.5 billion in debt institutions. They don't want that and they don't want the unsellable properties. And the only person that wanted it at the time, it seems like, was Joel Greenblatt. That's what he wanted. And so that's where he looked.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Alright, so we did talk about it before, but just to recap, it has to do with mandates and size constraints. And also, it may not have been the business that the institution wanted to begin. And oftentimes the shareholders and the institutions just want the stock of the parent because that's what they invested in the first place. So as it applies to this case study, Host Marriott, which is the spin co, was actually only going to be 10 to 15% of the parent. And so at the time, the parent was a 2 billion market cap. So if you do the math there, that means the spin co was going to be just 200 to 300 million, which makes it a microcap. And just to recap again, Marriott International was the management business. It was debt-free, and 85% of the business valuation was for Marriott Internationals. And so institutions want that. That's the business that they want. It's larger. It's a fantastic business.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
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2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Development and ownership of hotel properties. So this portion of the business would be called Host Marriott or the Spinco. With common sense, you can just think that with the development of hotels, owning the properties, it involves a lot of debt. And so Ballenbox Solution was to separate the two businesses so that shareholder value could be unlocked. Because with these two businesses muddled up together, the market couldn't really appreciate the valuation of one or both businesses.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. So at the time, Marriott Corporation, they announced in October of 1992 that they were going to do a spinoff. And so at this time, what happened was there was a huge real estate downturn. So what ended up happening was there was just a bunch of hotels that they just could not sell. So they brought in a gentleman by the name of Stephen Bullenbach to solve the problem. And Stephen Bollenbach, he was an expert in the industry. I mean, he worked with the biggest companies in the space and he worked with holiday, Disney, Hilton, AIG. So Marriott at the time had two businesses. The first was the hotel management business, which is the good business that everybody wanted, where they generated consistent earnings from fees. And basically, they managed hotel properties for others. And so Mary International was the parent company or the good portion of the spinoff. The other business involved or it was the toxic waste that you mentioned. This business was the”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“That your brain encodes information from the pen to paper, it's just a lot different. And so it's almost like seeing the matrix, right? You're able to see the patterns within the patterns. And so there are a lot of resources out there, but my recommendation is if you have the time, if you are a really good investor, you're good at analyzing information, just put together your own calendar or spreadsheet of all the situations like Greenblatt talks about, spin-offs, merger securities, risk arbitrage, post-bankruptcy exits, and all that good stuff.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“You know, you have keyword alerts fed to you, you're actively searching for these situations yourself, you can actually internalize everything and you're more connected to the corporate events and transactions, as opposed to depending on five, ten, or 20 resources to feed information to you. Then there's a disconnect there. And so it is similar to the way that I train my investment analysts, for example. I always tell them you need to build your own model. And what that means is it starts with putting in your own numbers. Don't import the numbers. So if you put in the numbers line by line, sell by sell, you're naturally going to be quote unquote one with the numbers. If you do that, if you go to the painstaking process of putting in all of the numbers as opposed to importing it and having your model spit out a number at you, you're going to be able to see things in a different way because you process the numbers and information differently. It's like when you use pen and paper to take notes as opposed to just typing it out.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT
“No go to resource, but there is definitely a lot out there. I mean, whatever you're looking at, the great thing about this day and age is that we have Google. For example, Joel Greenblatt did not have access to information like we do now when he ran Gotham, right? Because he was in the 80s and 90s, in the early 2000s. I'm even then, he didn't have the internet that we have today. It's just not the same. And so if you're looking for spinoffs, you can just say, hey, go to Google and type in spinoff calendar. And a bunch of results will come up and they'll actually give you a calendar with all the spinoffs. Or, you know, if you're interested in risk arbitrage, you can just Google that and you'll have a calendar of situations to look at. But you were talking about doing your own work. And I actually do believe in that. So my recommendation to investors is to actually do your own work, right? To make your own spreadsheet, your own calendar. Because the difference is if you do your own work, you search for press releases.”
2024-11-22 · We Study Billionaires · TIP677: You Can Be a Stock Market Genius w/ Roger Fan · IDENTIFIED FROM THE TRANSCRIPT