From a speech that Seth Klarman gave to a group of Professor Greenwald’s Value Investing Class, we know that he has analysts that just focus on spin offs, changes in indexing, bankruptcy etc. These create vacuums where force sellers rule the day due to investment constraints. In the example of an index fund trade, imagine a somewhat illiquid stock dropping from an index. Index funds across the board need to sell the holding to maintain their index match which creates a situation of uneconomic selling which in turn may create a dispersion between price and intrinsic value. It is also rumored that Baupost’s investments in MLPs in late 2008/early 2009 stemmed from the fact that Lehman brothers held 20% of the float of the companies and were forced sellers as their prop desk unwound.
This is a great investment thesis for me right now. Trying to identify forced sellers who must sell there holdings to maintain there index match. Nothing is better than buying from a distressed buyer wether it be in real estate,equities, or even a friend who is tight on cash and needs to sell an asset to raise money for an upcoming rent payment. Many of these forced sold stocks will be highly illiquid but if your a true long term investor then liquidity is not a concern. This is a great time to look for these opportunities and capitalize. Even Pimco manager Mohamed El-Erian had this to say about illiquid markets.
“So return expectations have to be more realistic, unless you’re willing to go from the liquid markets to truly illiquid markets. There it’s very different. It’s all about completing markets. It’s a very different game, but you don’t have the liquidity that most people need.”
“Investing in a mortgage company in Brazil. You’ve got to do it knowing that it is a long-term investment and that liquidity is not going to be there.”
“But think about it. You go to developing countries where the middle class has become relatively well off. There is a housing stock, and there are savings, but there’s no one to link the two things because there isn’t a tradition that we have in the U.S. of borrowing against your future income, and you don’t borrow against your future income till you achieve a certain level of wealth.”
“So linking up markets that now make sense — that’s where the double-digit return is going to be. But that is not something that’s accessible to the average person.”
[check out rhie, I believe blackrock has been forced to be a seller due to either end of the year tax selling, index matching issues,or painting the numbers for q4 earnings. This stock can have liquidity problems and may present a wonderful bargain]