Benjamin Graham on Special Situations

Benjamin Graham gives a clear definition of what he considers a special situation. Below is a quote from Graham:

First, just what is meant by a “special situation”?Convention has not jelled sufficiently to permit a clear-cut and final definition.In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance.In the narrow sense, you do not have a real “special situation” unless the particular development is already under way.


This distinction is readily apparent by reference to the wide fields of bankrupt corporations and preferred stocks with large back dividends.In the former case, “the particular development” would be reorganization; in the latter, it would be discharge of the arrears, usually by a recapitalization. Many practitioners will say that a company in trusteeship does not constitute a special situation until a reorganization plan has actually been submitted; similarly, there must be a definite plan on foot for taking care of dividend accumulations.Thus, American Woolen Preferred may have had interesting possibilities for years because of its very large back dividends, but it became a true special situation only when the buyer knew that a plan of repayment had been or was soon to be announced.

There is a logical and important reason for favoring this narrower definition of a special situation. By doing so we are able to conceive of these commitments in terms of an expected annual return on the investment.As will be seen, such a calculation involves quite a number of estimates in each case, and thus the final figure bears little resemblance to the bond yields taken out of a basis book. Nevertheless, this technique is valuable as a guide to the operator in special situations, and it gives him an entirely different attitude toward his holdings than that of the trader, speculator or ordinary investor

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