Something about Spin-off and something not.

**xxyygorich** Sat Aug 26, 2006 6:28 pm

Something about Spin-off and something not.
First,
Something not about Spin-off
HIGHLY Recommend the following interview videos about Warren Buffett.
Charlie Rose - Warren Buffett: The Man - Part One in a Three Part Series
http://video.google.com/videoplay?docid=6701318343299922276
Charlie Rose - Warren Buffett: The Business - Part Two in a Three Part Series
http://video.google.com/videoplay?docid=-6208910876057109785
Charlie Rose - Warren Buffett: The Gift - Part Three in a Three Part Series
http://video.google.com/videoplay?docid=-4846290947664386236

These interviews are really enlightening on aspects of being a good investor and attitude to life.

STAY FOCUSED
The most important gradient of Mr. Buffett's success is his extraordinary capability of staying focus, in his words "concentrating on what’s important.”. It might be very obvious to most people. But it might be very hard to achieve if you don’t have the guts. I checked my email every 10 mins if not every 5 mins, I just realized that how hard to concentrate to do the most important things in your daily life. I bought a book and didn’t finish it for months, but I finished on the flight where I had nothing to do but reading. I still remembered when I started to buy and sell stocks I didn’t do nothing but looked on the price up and down everyday. You can say I was “focusing” on looking at the price, but I neglected the most important thing of buying or selling the stock is not the price up and down of a stock, but the intrinsic value of the stock. If I stayed focus on my research, I might have graduated sooner.

Waiting for the right pitch
In Warren’s eye, the market is like a pitcher, it throws you all kinds of opportunities of buying or selling. He is just “waiting for the right pitch”. My understanding has two folds, one is that you are waiting for a good opportunity, for example a good stock at a bargain price, the other is doing what you are good at, say buying the business you understand or investing in some special situations (like spin off) you are experienced at.

I only look for 7 footers
Warren said if he was a basketball coach, he would only choose his team from 7 footers. He mentioned that because he can buy only the certain size of business due to the gigantic size of his funds. But it enlightens me from other aspects. Choosing 7 footers for a basketball team is like building a portfolio. I only want to pick the best of the bests. What are those 7 footers in the stock market? They can be stocks with lots insider purchase, involved in special situations (like spinoff), which in the history gave a better performance than indexes, or the stock you understand. Like blast, he mentioned he was not good at insurance stock, so all stocks other than insurance stocks can be his “7 footers”.

HIGHLY RECOMMEND THE INTERVIEWS AGAIN.

SOMETHING ABOUT SPINOFF
1. Spinoff, in general beat the market.
The researches showed that that stocks of spinoff companies outperformed their industry peers and S&P 500 by 10% in their first three year independence and parent companies also outperformed by 6% than its peers. The largest gain for spin-off companies took place not in the first year after the spin off but in the second. So spinoff play stocks can be our “7 footers”, and we have enough time to do our research and make profitable investment.

2. Why does spinoff beat the market? And why everyone knows that, it still continues to outperform?
The reasons behind of a spinoff might be multiple. But the key of the good performance on spinoff stocks is that the spinoff process itself is a fundamentally inefficient method to distributing stock to the WRONG people.. Generally, the new spinoff stock is given to shareholders who are mostly interested in the parent company. The spinoff company might be too small for certain funds to hold. These situations will cause “INDISCRIMINATE” selling and depressed bargain price for spinoffs. Focused people success, focused businesses do the same! Spinoffs and parent companies become more focused and usually become more profitable. Partial spinoff is a specific kind of spinoffs, the partial of spin off company is issued by IPO and parent companies hold major stakes of the spinoff. By subtracting the value of spinoff hold by the parent from the value of the whole parent, we might find bargain on the rest business of the parent.

3. How to pick the best from the bests?
Insiders always give you some tips.

Reference:
You can be a stock market genius
Joel GreenBlatt.

Highly recommended this book too, fun to read and very easy to understand.

**shma** Sat Aug 26, 2006 9:51 pm

Thanks for sharing your ideas and recommendation:)