How To Hack The Stockmarket

2
How to Hack the Stock Market

Special Notice 4
Chapter 1 Introduction 5
Chapter 2 A Primer on the Stock Market 7
Chapter 3 So What is this Loophole? 14
Chapter 4 How to Calculate a Fair Price Per Share 19
Chapter 5 Why You NEVER Pay a Fair Price 27
Chapter 6 Insider Trading that is Perfectly Legal 31
Chapter 7 Real Examples of Loophole Profts 32
Chapter 8 Putting it All Together. A Step-By-Step Guide 35
Chapter 9 When to Sell 45
Chapter 10 Further Reading 48
Bonus Chapter #1 Risk Free Profts via The 2nd Loophole 50
Bonus Chapter #2 How to Totally Automate ALL of This! 54
Table of Contents
3
Before you start reading the report, I need to tell you something important. Ive recently added a new chapter to the report, its right at the
end called Bonus Chapter #2 How to Totally Automate ALL of This!.
The chapter explains a way for you to automate the entire process explained in this report. Its a weird way for you to make all the proft
without any of the hard work. It really is cool and Id advise you to read the chapter frst.
Click Here
Special Notice
4
This is my frst major information product. I am not an
accomplished author or speaker, so this product will have some
faws. If you read for style, or for literary quality, like I was saying
before, this may not be for you.
But there are paragraphs in this report ideas in this report
whole chapters in How to Hack the Stock Market that will
have you slapping your thigh and gleefully punching the air
above you.
Im not blowing smoke when I say: This report could have you
earning thousands of dollars from the stock market - almost
immediately after youve fnished reading it.
Heres why:
Every 3 to 4 weeks there is a certain pattern that happens in the
U.S. stock market.
This pattern occurs every 3 weeks at most AND it only happens
to stocks listed on the NYSE and Nasdaq markets.
But when you understand this pattern you can buy shares in
little-known companies at up to 80% off their true value.
Almost religiously after youve bought your shares the pattern
will reverse. The stock will climb higher and higher - Allowing
you to leisurely watch as your money doubles and triples in a
matter of weeks.
After that the hardest decision youll need to make is when to
sell and collect your handsome proft.
Whats more you can do it all from the comfort of your home
computer or laptop. All you need is an online brokerage account
and a live up-to-the minute intraday graph.
However, if you know how to use these simple tools and, you
have the ability to focus on the market for approximately one
hour each week There is no limit to the amount of profts you
can make.
In case youre skeptical, you neednt risk a penny in testing it
out. Most online brokerages allow you to use a fake money
account to test your strategies.
Allowing you to watch frsthand as this pattern occurs each and
every month And use this monopoly money to place live
trades and see for yourself how easy it is.
Once youre confdent You can invest as little or as much as
you like exploiting this loophole.
For example: With just $3,000 to invest you could feasibly
generate a $10,000 monthly income.
How would an extra $10,000 a month change YOUR life?!
Of course, thats enough to live on and then some. It actually
takes me more time to drive to my local bank and get $300
from the ATM than it does to make it using this stock market
loophole!
Right now... Im sure youre skeptical as hell. You may even be
thinking to yourself that you have bought the diary of a madman.
But let me make you a small promise:
Give me a few days.
Chapter 1 Introduction
5
Study this report.
You will never be the same again.
Once you learn what I have to teach you... unless you somehow
lose your memory... it will be impossible for you to ever be
ordinary again.
It would be impossible for you to not know how to make tons of
money And it will be impossible for you to forget about what
you read.
I hope youll give me the beneft of the doubt with my promise.
If you do, please read on.
But if you cant cast-aside your skepticism, please do not waste
any more of your time reading any further. Unless you believe
in me - How to Hack the Stock Market will be worth nothing
to you.
Anyway, before we jump into this thing with both feet... lets get
acquainted. Maybe I should tell you a little bit about myself.
I was born in Cincinnati, Ohio on March 14th 1978. I grew up
with a poor but comfortable upbringing - without a Father.
I was born with a mild form of Aspergers syndrome. And this
gave me an intense passion for numbers and patterns. At about
age 15, this passion evolved into a fascination with the stock
market.
It was never about the money for me. My intense interest in
the stock market was just a manifestation of my Aspergers
syndrome.
I spent years of my life reading copious stacks of library books
All about the inner workings of the stock market.
It probably sounds boring to you but these dusty old library
books literally kept me up at night.
But despite my intense passion for the stock market it wasnt
until the age of 28 I stumbled on this stock market loophole.
I was actually working as a janitor at the time and living in rent
control housing in California.
But...
Whats most intriguing about this loophole Is that no matter
how many people follow this technique. No matter how many
people I teach it to:
It will NEVER stop working. The loophole is literally built into
the system. Wall Street will never care about plugging this gap
because the amounts are too small for them.
A thousand here, a thousand there To Wall Street this is like
picking up pennies from the curb. To an ex-janitor like me, or a
work at home mom The chapters you are about to read are
gold.
One more thing...
Its just as hard to make $100 using this loophole as it is to
make $10,000. I do not mean this in a negative way...
I mean it in the most positive way possible.
Its just as hard to turn one dollar into three dollars one hundred
times as it is to do it ten thousand times, so why not do it to its
fullest? I sure do.
6
Before we get down to the nuts and bolts of my stock market
loophole. I need to give you a quick primer on investing. Im
talking about real investing. Not taking punts on a stock
because you heard somewhere its hot.
Investing in a stock because a friend or uncle told you to is pure
folly. Likewise investing because a hot stock is about to split, or
because you liked the story is also a mistake.
In the next few pages Im going to explain a mindset with which
to view the stock market. Dont worry; this isnt some Tony
Robbins-esque motivational thing. Im not going to ask you to
chant along with me, or believe in yourself.
Although I do want you to do one thing.
Suspend your belief that other investors are smarter or more
intelligent than yourself. You may not believe it right now, but
just open your mind to the possibility that Wall Street is not as
smart as theyd like you to think.
Stocks are not wiggly lines.
Most investors (and especially traders) think of stocks as
wiggly lines on a chart. And these lines could wiggle upwards
or they could wiggle downwards. To them a stock is an
electronic price quote and the price is all that matters.
This fuzzy thinking is mostly true of day traders. The types
who try and predict if a stock will go up by plotting chart
patterns and levels of resistance etc.
Whats wrong with this thinking?
The stock market wasnt setup over 100 years ago for shares
to be bought and sold based on fctional chart patterns and
so called resistance levels. Nobody could even imagine a
computer back then, so charting & day trading didnt even
enter their minds as a use for the stock market.
Following chart patterns is in my opinion a pseudoscience,
and choosing to learn day trading instead of investing is akin
to studying acupuncture instead of medicine.
When you buy a stock youre actually buying a fractional
ownership of the underlying business. Youre buying the
income stream, youre buying the assets and youre taking on
the debt.
This may sound obvious but think about what this means.
Whenever youre buying stock you should imagine youre
in fact buying the entire company. My point is a billionaire
investor wouldnt buy an entire company because he heard
it was hot, or the chart pattern told him to He would buy an
entire company because:
He believed earnings will continue growing giving him a
high return on his investment. Therefore if Mr. Billionaire
paid a 10x multiple on todays earnings, he estimates he
can sell in 5 years at the same 10x multiple of much higher
earnings.
Or his reason may not be based on earnings; it may be
based on the companys assets. Maybe the company has
15 factories on the books valued at $20 Million. Because
Chapter 2 A Primer on
the Stock Market
7
of historical cost accounting assets are never marked up in
value (even real estate). So if these factories were bought
in 1902, they could be worth $700m by now a huge
hidden asset Wall Street has missed.
Most at home investors dont even look at what they receive
in return for their money. They probably barely glance at the
assets, liabilities and earnings stream they buy All because
they view their stock as a fast moving price quote instead of
ownership in a real, live business.
Let me give you an entirely possible (and actually quite
common) scenario. Imagine two companies trade on the stock
market, Union Book Company and Digital Books Corp.
UBC is viewed as a relic of old. This company was formed in
1937 and plods along each year selling books from their direct
mail catalog mainly to mature customers aged 50+.
On the other hand Digital Books Corp is viewed as new and
exciting. Setup 3 years ago they sell digital books online
mainly to young, switched on customers.
It just so happens: both these companies earn $10 million per
year and both have $200 million of debt. The only difference
between the two is the cash balance. UBC has $250 million of
cash on hand whereas DBC has only $50 million.
Union Book Company. (UBC) Digital Books Corp. (DBC)
Cash: $250 Million Cash: $50 Million
Total Debt: $200 Million Total Debt: $200 Million
Net Income: $10 Million Net Income: $10 Million
Market Cap: $100 Million Market Cap: $100 Million
Union Book Company. (UBC) Digital Books Corp. (DBC)
Real Cost: $50 Million Real Cost: $250 Million
Real Earnings Yield: 20% Real Earnings Yield: 4%
Most investors wouldnt take the cash balance into account.
Theyre too busy plotting a chart, or getting swept up in the
romance of Digital Book Corps impressive business plan and
growth projections.
Heres why thats such a big mistake.
The market cap of a company is the price per share x total
number of shares. i.e. its the price of the entire company.
So UBC and DBC cost exactly the same amount, right? Both
have a market cap of $100m which makes sense considering
they both earn $10m per year.
This would give you an earnings yield of 10%. i.e. if you
bought the entire company for $100 million youd be paid $10
million per year.
The problem is this common assumption is wrong.
Union Book Company really costs just $50 million; On the
other hand Digital Books Corp costs a very real $250 million.
This gives Union Book Company an even juicier 20% earnings
yield, and Digital Books Corp a 4% yield (Less than you can
get from a risk free U.S. government bond).
How so?
Because whether buying one share, or an entire company you
receive a proportionate ownership of their assets, debt and
earnings stream.
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If you bought the entire Union Book Company for $100 million
you could immediately use their $250 million in cash to pay off
the entire $200 million debt. And youd still have $50m in cash
leftover. Since you own the entire company you can take this
money and pocket it.
E.g. Union Book Companys Net Debt = +$50m
Instead of spending $100 million on buying Union Book
Company youve in fact spent just $50 million, because the
company was cash rich. And you have a steady $10 million
per year income stream giving you an earnings yield of 20%
on your investment.
You can probably see where Im going with this.
Digital Books Corp has net debt of -$150 million ($50m cash -
$200m debt). Which means if you bought the entire company
for $100m, then used the $50m in cash to pay off debt
Youre still left with $150m in debt.
E.g. Digital Book Corps Net Debt = -$150m
Which means you didnt really buy the entire company
for $100 million like you thought, your real cost was $250
million Because you took on $150m in debt as soon as you
acquired it. Leaving you with a rather undesirable 4% earnings
yield.
Sure when you buy shares in a company you arent personally
held accountable for the debt. When buying shares you can
never lose more than you invest. But this doesnt mean you
can ignore a companys assets and liabilities. After all the
companys debt repayments will affect future earnings and
your share of those earnings.
My point with all this? You cannot make money in the
stock market treating shares as fashing price quotes. The
companies are real and your share of the company is real.
You wouldnt buy a local restaurant without glancing at the
books. But this happens every day in the stock market when
day traders invest based on the pattern of a wiggling line.
Billionaire investors like Warren Buffett consistently buy stocks
like Union Book Company. Stocks where the proft is made
before theyve sold any shares. Because
Price is what you pay. Value is what you get.
Heres another way of putting it:
Imagine two men, one in Columbus, Ohio (Dave) and one in
New Jersey (Adam). Both Dave and Adam are newlyweds
starting a family and need a new, cheap second hand car.
Both happen to fnd a car they like, and it just so happens the
cars cost exactly the same amount ($4,000).
We can all agree $4,000 is the price (or sticker price) of each
car.
But what Adam or Dave receives in exchange for their $4,000
can be drastically different.
In New Jersey, Adam visited a local second hand car dealer.
The sleazy hotshot salesman sold Adam a car he picked up
at auction just a week earlier for $1500. The car is a mess.
It was involved in a collision and put back together at some
point. Of course, Adam wasnt told about this He was in awe
of this fast talking, sharply dressed salesman.
Meanwhile Dave bought a $4000 car from his neighbor. The
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neighbor, an elderly man had bought the car just a year earlier
for $8000 but had suddenly run into fnancial problems and
needed cash fast. He sold this fne car at a knock down price
and accepted the loss. His loss was of course Daves gain.
In both cases the sticker price was the same - $4,000.
But the VALUE was much different. You cannot put an exact
amount on value because it isnt written anywhere and the
fgure is subjective. But its plain to see Dave got much more
than $4,000 in value while Adam received much less than
$4000 in value.
This same thing happens in the stock market every day.
Companies with exciting stories (like bio-technology) sell at
sticker prices well above their true value.
Meanwhile boring & stoic companies like manufacturers sell at
sticker prices well below their true value.
You see, every company trading on the stock market has
an intrinsic value Nobody knows what this exact value is
because companies are complex machines with thousands
of variables.
But, right now there will be hundreds of stocks trading at 50%
or less of their true value. In other words dollar bills selling
for 50 cents. And youre much more likely to fnd these 50-
cent dollars amongst the boring and unloved than the exciting
stocks Wall Street loves.
But I hear you ask, if boring companies are always valued
at say 7x earnings while exciting companies are always
valued at, say 20x earnings How can I realize a proft on the
difference, how can I sell my shares in a boring business for a
more sensible 10x or 11x earnings.
The Only Universal Truth
This is the only point Im going to need you to accept a
universal truth. Here it is:
In the short-term stocks can sell at any price (cheap, fair
or expensive). But in the long-term the price always moves
towards fair (where value roughly equals price). In the long
term (1 3 years) the stock market is effcient, in the short
term it can be hugely ineffcient.
To use the same analogy. The same can be said about
the second hand car market. Say you want to buy a 2006
Ford Mustang. At any point in time there will be some 2006
Mustangs selling very cheap, some very over-priced BUT on
average, most 2006 Mustangs will sell at a fair price.
The market for second hand cars as a whole (the markets
fctional hive mind) will have a fair price in mind for a good
condition 2006 Mustang. But there will always be outliers.
The elderly neighbor selling in a hurry or the sleazy salesman
squeezing out every last dollar.
Likewise most stocks sell at a fair price. Your job is fnding the
outliers. The ones selling very cheap.
Most often (like the elderly neighbor) these cheap stocks are
neither sexy nor exciting. Funeral homes, tobacco processors,
DIY megastores etc.
As opposed to the fast & exciting new bio-tech with a miracle
patent on the brink of curing cancer. It has no revenues, let
alone profts But just think of the possibilities!
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One youve bought shares in what you consider a ffty-cent
dollar you hold onto the shares and wait. And youll only
consider selling when they eventually reach your estimate of a
fair price.
But its not always plane sailing. Sometimes after youve
bought a stock it can drop no matter how cheap it is.
Lets say you value a stock at $13 per share. If after youve
bought this stock at say, $6 it suddenly falls to $4 you do not
sell in a panic induced haze. You should in fact be happy; the
market has offered you more $13 bills for the even bigger
bargain price of $4 each.
If you liked it at $6 you should love it at $4. And if you have no
more money to invest, you just sit tight and wait for the market
to crawl up to a more sensible $10 - $13 per share.
Mr Market.
Now, just in case a few of you still havent got it. Im going to
explain it yet another way.
Imagine you are partners in a private business with a man
named Mr. Market. Each day, he comes to your offce or home
and offers to buy your interest in the company or sell you his
(the choice is yours).
The catch is, Mr. Market is an emotional wreck. At times, he
suffers from excessive highs and at others, suicidal lows.
When he is on one of his manic highs, his offering price for the
business is high as well, because everything in his world at
the time is cheery. His outlook for the company is wonderful,
so he is only willing to sell you his stake in the company at a
premium.
At other times, his mood goes south and all he sees is a
dismal future for the company. He arrives dejected and pale,
tie loose around his neck. He is so concerned, he is willing to
sell you his part of the company for far less than it is worth. All
the while, the underlying value of the company may not have
changed - just Mr. Markets mood.
The best part of this entire arrangement: you are free to ignore
him if you dont like his price. The next day, hell show up at
your door with a new one. For your interest, the more manic-
depressive he is, the more opportunity you will have to take
advantage of him (dont worry, he doesnt have feelings or
mind being taken advantage of.) As long as you have a strong
conviction of what the company is really worth, you will be
able to look at Mr. Markets offers and reject or accept them...
the choice is yours.
This is exactly how you should look at the stock market -
each share that is traded is merely a part of a business. Each
morning, when you open up the newspaper or turn on CNBC,
you can fnd Mr. Markets prices. It is your choice whether or
not to act on them and buy or sell.
If you fnd a company that he is offering for less than it is
worth, take advantage of him and buy as much as you want.
Surely enough, as long as the company is fundamentally
sound, one day he will come back under the sway of a manic
high and offer to buy the same company from you for a much
higher price.
By thinking of stock prices in this way - as mere quotes from
an emotionally unstable business partner - you are free from
the emotional attachment most investors feel toward rising
and falling stock prices.
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Before long, when you are looking to buy stock you will
welcome falling prices. The only time you want to invite high
stock prices is when you are eager to sell your shares for
some reason. Thankfully, in most cases (except those caused
by Life), you are free to wait out Mr. Markets emotional roller
coaster until he offers a price that you consider equal to or
higher than true value of your shares.
This mindset is your greatest advantage in investing.
The Dividend Fallacy
Theres one other thing I need to address. The fallacy of
dividends. When telling friends or family you live off your
investments theyll often say something like so you own
dividend stocks. Uninformed investors believe receiving a
dividend is something extra a freebie.
They can be forgiven for thinking this. During the frst half of
the twentieth century, Wall Street believed that companies
existed primarily to pay dividends to shareholders. The past
ffty years, however, have witnessed the acceptance of the
more sophisticated notion that the profts not paid out as
dividends that are reinvested in the business also increase
shareholder wealth.
Profts not paid out can be used for expanding the companys
operations through organic growth and acquisitions or
strengthening the shareholders position through debt
reduction or share repurchase programs.
Whether a company youre invested in pays out 80% of
earnings as a huge dividend each year or retains all earnings
to be reinvested. In real terms, youre no better off either
way as long as the company doesnt have egotistical or
inept management who will squander the money (overpriced
acquisitions being the biggest culprit).
However dividends are good for providing a foor on a stock
price. Notwithstanding some big accounting scandal a healthy
dividend will keep a stock above a certain level. On the other
hand a big dividend is a message from management that they
dont believe they can invest excess cash at good rates of
return. Instead theyre giving the money back to shareholders
so it can be invested elsewhere. This is often indication of a
company late in its life.
In short: Whether you own one solitary share or the entire
company - earnings are earnings. At the end of the year
youre richer because the company made an economic proft,
not because you cashed your dividend check.
Lesson Over
Now, you have a burning question. I can tell. Let me take a
guess.
Youre thinking if it really is this easy to make money in
the stock market. Why isnt everyone doing this, surely the
Harvard MBA types on Wall Street with the 180 IQs would
know about this and any proft would have been competed
away.
After all, Wall Street is a cut throat industry. Where the
smartest whizz kids are hired straight from college, and
provided with teams of analysts, research and computing
power.
What would be left for little old you and me with a laptop
computer and pocket calculator?
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Oh, ye of little faith. Read on down to Chapter 3 where I
explain exactly why Wall Street MBA types are not competing
for these easy profts and why in fact theyre the ones youre
stealing from!
13
So weve established that the way to consistently make money
in the stock market is by buying bargains. Accepting this simple
logic makes you what is known on Wall Street as a Contrarian
Investor, someone who makes investment decisions based on
their own sound reasoning rather than following the herd.
The crazy thing though, is that only in the world of Wall Street is
getting a good deal seen as unusual and strange.
Forget the stock market for just a moment.
In the world of private business, companies too are bought
and sold each day. With no Wall Street analysts, research
departments and hedge funds. Decisions on the pricing of
companies are far more rational.
Buyers of private companies want a good deal. They want to
see a solid business with a good record of earnings, they want
a lot of liquid assets and as little debt as possible.
But the critical point is that buyers of private businesses also
want to pay a fair price (at most). Likewise sellers of private
businesses are willing to accept a fair price.
However, suddenly once a company becomes a public entity
with a catchy four letter ticker symbol. As long as it has a hot
story to tell (dot com companies, gene splicing biotechs etc.)
theyre sold to investors at prices many times the amount a
rational businessman would pay.
However, interestingly the reverse is also true. Companys Wall
Street is bored of are sold at levels far below what a rational
businessman would pay. Its been like this pretty much since
the stock market was created, at any one time something is in
vogue and something else is not.
When buying into a hot stock, Wall Street wants you to swap
your cash for something worth much less. A pipe dream that
the stock you buy will be the next Microsoft or Google. It could
happen, but crossing your fngers and hoping is far from a
surefre way of getting rich.
No. Instead you need a plan.
A methodical and logical strategy you can follow. There will
be no Ive hit the jackpot moments - Your successes will be
small and consistent with as few capital losses as humanly
possible.
If Wall Street is one big casino, Im about to teach you how to
count cards.
Lets get down to it.
The Loophole
So the aim of the game is swapping every dollar you invest for
something worth more than a dollar. You wont know exactly how
much more But you only need to be approximately right.
You dont need scales to tell you a 300lb man is overweight,
likewise you dont need any special tools or experience to spot
the absolute stock market bargains were looking for.
Now, you can fnd these bargains anywhere. Every stock
throughout a 52-week period will swing from massively
Chapter 3 So What is
this Loophole?
14
overpriced to massively cheap. You can see evidence of this in
the 52-week range of any stock you care to punch into Yahoo
Finance. Its not unusual for a stock worth $60 per share to
swing from $30 to $90 over the course of the year.
But the loophole makes it easier. Much easier.
The loophole is a specifc area of the stock market where
bargains are plentiful. It is a faw, practically built into the system
which pushes stocks to prices far below their true worth. At
prices the layman can tell is extremely cheap.
These bargain stocks only come about once or twice a month
at most, and no alarm bells will ring to tell you where these
stocks are or when to buy them. You can view searching for
these bargains like looking for buried treasure, itll take some
hard work, but the thrill is in searching for them.
Spin-off Stocks
The area of the stock market Im talking about is in corporate
refuse. A spin-off transaction is when a publicly traded company
wants rid of a (usually much smaller) subsidiary company.
The subsidiary company becomes a public company in its own
right and shares of this new company are distributed to the
parent companys existing shareholders.
There are many reasons why companys spin off their
subsidiaries, but there is only one reason to care: These
spin-off stocks consistently make bagfuls of cash for shrewd
investors.
One study at Penn State*, covering a 25 year period ending
in 1988, found that stocks of spin-off companies on average
outperform their peers and the S&P 500 by about 10 percent
per year in their frst 3 years after being spun-off.
(* Patrick J Cusatis, James A. Miles, and J. Randall Woolridge,
Restructuring Through Spinoffs, Journal of Financial
Economics 33 1993.)
What does this mean?
Over the long term the market averages (like the S&P 500)
return roughly 10% per year. In other words if you bought 30
random stocks on the S&P 500, over 10 years or so youre
likely to make a return of 10% per year.
But, if instead of buying a random selection of S&P 500 stocks
you buy a random selection of freshly spun-off stocks. The
study shows youll outperform the S&P 500 by 10% per year.
Which means instead of making a 10% per year return, just
buying random spin-offs could see you earning a 20% average
return.
And just in case youre thinking 20% isnt enough. It is.
Warren Buffett is the worlds richest billionaire because he is
able to compound his wealth at a rate of 28% every year.
Put it this way, imagine you invested $10,000 in a basket of
spin-off stocks today. And every 3 years you sell those spin-
offs and buy a new selection of spin-offs. As weve shown you
should earn roughly a 20% average yearly return.
$10,000 earning a 20% return each year will be worth $383,376
by the end of year 20!
A Chimp Throwing Darts
So gather a list of all the spin-off stocks and write each down
15
on a piece of paper. Then (this bits important) pin them to a
dartboard. An untrained chimp throwing darts should be able to
pick a selection of stocks that will earn a 20% yearly return.
Not bad.
But what if instead of picking random spin-off stocks you do
a little work. You take at least a cautionary glance at their
earnings, assets and debts. What if you remove the ones with
unserviceable debt loads and those making losses?
Its feasible (and entirely possible) that by removing the bad
apples instead of making a 20% average return, you could
instead make a 25% or even 30% yearly return.
At a 30% average return your $10,000 investment is worth $1.9
Million by year 20!
Hmm, Tell Me More
To understand how and why spin-off stocks make so much
money. You need to know a few basics.
Well start with why stocks are spun-off in the frst place. The
reasons are diverse, but all are straightforward and perfectly
logical.
Unrelated businesses: A steel and insurance
conglomerate can spin-off the insurance company into
its own public entity. This will allow investors to invest
in either the insurance or steel company but not both.
All other things equal the stock market will assign a
higher value to the businesses separately than together.

Why? Because prior to the spin-off investors in the steel
industry may still buy the conglomerate but want it at a
discount accounting for the forced purchase of an unwanted
insurance company.
Getting rid of a dog: Sometimes management consider
the spin-off a bad business. Theyll see the spin-off as a
way of ridding the unfettered good business from the bad.
(A side beneft is that management focused on the bad
spin-off, with appropriate incentives has a good chance of
turning the ship around.)
Load the dog with debt: Sometimes management will
sneakily spin-off a bad business and load the balance
sheet with as much debt as it can handle. In this way debt
is shifted from the parent to the spin-off directly creating
shareholder value for the parent. Every $1 of debt handed
to the spin-off is $1 of value for the parent.
A tax-free dividend: Occasionally management may
want to reward shareholders with a large cash distribution.
The problem is this dividend will invariably incur a large
tax expense. One way of rewarding shareholders without
forcing a tax expense is spinning off a subsidiary company.
Shareholders who want the cash can sell their shares in the
subsidiary, everyone else can hold.
A quick solution to antitrust issues: In a takeover
sometimes the acquirer doesnt want to or cant (for legal
reasons) own a certain business. The solution, which
allows the takeover to go ahead, is to spin-off the problem
subsidiary to the target companys shareholders.
I could keep on going, but you get the point. Spin-offs happen
for a variety of reasons. But the one common thread is that
recently spun-off stocks handily outperform the market. Why is
this? And
16
Why Will this Loophole Never Close?
Luckily for you and me, these stock market profts are practically
built into the system.
Generally stock in the new spin-off is given to shareholders in
the parent company. These shareholders were (for the most
part) investing in the parent not the smaller subsidiary. Most
investors had probably never heard of the subsidiary until told.
Therefore once the spin-offs stock lands in the parent company
shareholders brokerage accounts it is usually immediately sold
on the open market. Importantly it is sold without regard for the
underlying value of the spin-off company.
The initial excess supply of shares being sold has a predictable
effect on the stock price. It bombs. And its not just weekend
investors who indiscriminately sell their shares, supposedly
shrewd investors on Wall Street are even more predisposed to
immediately selling their shares.
(Remember I told you, you wont be competing for these easy
profts with stock market pros on Wall Street? Heres why.)
Most of the time the spin-off subsidiary represents only 10 or
20 percent the size of the parent company. Even if a pension
or mutual fund took the time to analyze the spin-off companies
prospects. Often the size of the spin-off is too small for an
institutional portfolio, it is actually against the law for them to
hold onto shares of the relatively tiny spin-off.
When First American Financial was spun off from First American
Co. they included this paragraph in their Form 10 to explain the
situation to investors:
We expect that some First American shareholders, including
possibly some of its larger shareholders, will sell the shares of
our common stock received in the distribution because, among
other reasons, our business profle or market capitalization
as an independent, publicly traded company does not ft
their investment objectives. Moreover, index funds tied to
the Standard & Poors 500 Index and other indices hold First
American common shares. Unless we are included in these
indices from the date of the distribution, these index funds will
be required to sell shares of our common stock that they receive
in the distribution.
Subsequently FAF dropped from $19.42 a share to just $12.31
during the frst two weeks of selling pressure. The reason is:
Supply & Demand
What results from a spin-off distribution is a massive supply &
demand imbalance.
Almost all of the large institutional investors will immediately
start dumping their shares on the market. Furthermore you can
couple this with the confused individual investor whod much
rather just sell his newfound shares than look into what actually
happened.
On the other side of the table, who is making up the Demand
side of the equation?
Not many.
Remember while a lot of these spin-off companies are proftable
(some hugely so) they are almost always boring, unsexy
businesses. Wall Street doesnt care about them, they wont be
plastered all over the business press Theyre corporate refuse,
17
spun-off precisely because theyre unloved and unwanted.
In essence these spin-off stocks are the polar opposite of the
hot IPO. Boring rather than exciting and huge excess supply
rather than huge excess demand.
Pension funds sell their shares, mutual funds sell their shares,
individuals sell their shares, index funds sell their shares And
the price almost always plummets.
Supply towers far over demand, after all:
There is just a few oddball buyers like you and me scooping
up as many of these bargain shares as we can buy. Its fairly
common for a spin-off stock to start trading at, say $13 per
share and plummet to just $4 to $5 within a few months.
Picking Your Spots
Once youre convinced hunting for stock market super-bargains
in the shadowy corner of corporate refuse is a good idea. Youll
want to know how exactly to tilt the odds even more in your
favor. How to avoid the inevitable bad apples, and carefully pick
the best of the best in order to maximize your return.
In Chapter 7, I show real examples of spin-off bargains. This
is followed by Chapter 8 where I show, step-by-step with
screenshots exactly how to use the internet to fnd spin-off
stocks.
But frst, I need to teach you my method of putting a fair price
on any stock. Once you know a stocks fair price, deciding
whether or not to buy is easy.
18
We need an easy, objective way of assigning a dollar value
to any stock you come across. It may sound easy, but this is
in fact a hard undertaking. Im going to show you a shortcut
method of assigning a very rough value to any stock.
If you can spend 5 minutes calculating a fair price per share,
the decision to buy is simply checking to see if the current price
per share is at a 40% or better discount.
Put another way, this is the trick.
All investment errors come from miscalculating the value of the
security youre buying. If you somehow knew the exact value
of every share that trades You could become very rich, very
fast by simply buying stocks where the discount from true worth
is largest.
Lets begin:
Many academics profess you should use what is called a
discounted cash fow model to calculate the true value of an
investment. A discounted cash fow model is simply a forecast of
all the proft that can be taken from a business for the remainder
of its life. This proft (X) is then discounted by the rate of infation
back to what it is worth in todays dollars (Y).
If Y is $450 million then buying the business at any less than
$450 million will result in a proft.
The academics are correct, every business has a true value
and a discounted cash fow is the ideal method of calculating
this true value.
But there is one problem.
The output of the discounted cash fow model (in this case Y) is
only as accurate as the fgures used in the model. Calculating
a companys earnings for the next 20 years is hard, very hard.
Presumably unless youre valuing a bond (in which case DCF
is perfect) most companies grow their earnings each year.
Assuming a conservative level of growth, say 8% per year.
A company currently earning $20,000,000 per year will be
earning $58,743,872 by year 15. Meaning a majority of the
ultimate value of the company will be earnings from later years
(i.e. years 15 through 20).
So whats the problem?
The problem is that I dont know anyone who can predict
anything 20 years out. Manufacturers of personal cassette
players and pagers were probably very happy 20 years ago
and predicting great growth in unit sales A lot can happen in
5 years, never mind 20.
Im not saying discounted cash fows are useless, far from it.
But theyre most useful when valuing very stable businesses of
which you have intimate knowledge. Companies such as Coca-
Cola that have one product, which they have sold for over 100
years and rarely encounter operating problems.
So Whats the Answer?
Ill warn you now, the answer is not perfect.
Chapter 4 How to
Calculate a Fair Price Per
Share
19
No one can ever truly know the value of a company, you can
only take a best guess approach. But if you form a portfolio
of 30 stocks. And before buying each stock you guesstimated
their value, and only bought at a 40% or better discount to this
value
Some of the stocks will be rotten apples, one or two may even
go bankrupt and youll lose every cent. But on the other hand
some will explode in value, maybe even becoming industry
leaders and Wall Street darlings.
The bottom line is that you dont know what the future brings.
But by owning a diversifed basket of stock market bargains
your winners will offset losers and your gains will come from
both standard earnings growth & your shares rising to their true
value.
How to Value Any Stock:
My idea is simple, if somethings cheap you dont need a
complex computer model to tell you so. An experienced antique
dealer can spot a bargain at a fea market instantly. Likewise
when youre grocery shopping, the good deals are obvious.
Its no different with stocks. If you need a computer model to tell
you something is massively cheap Youre probably trying to
justify the unjustifable.
When you see a cheap stock, and I mean real cheap The
numbers will slap you in the face.
The easiest way to value a stock is to put a multiple on the
earnings the company generates. If a $10 stock earns $1
per share it sells at a 10x Price-to-Earnings multiple. Youve
probably heard of the P/E multiple before, it is widely used in
Wall Street because it is an instantly identifable price of a
stock.
This is the simplest method of seeing how cheap a stock is. You
can punch in the symbol of any stock on Yahoo Finance and
instantly see the P/E (price to earnings) multiple. In general,
a multiple of 5 is very cheap while a multiple of 30 is very
expensive.
(Side Note: A Price-to-Earnings multiple can be fipped round
into an earnings yield. A $10 stock earning $1/year has an
earnings yield of 10%. It also has a P/E ratio of 10.)
As always though, there is a problem. The price-to-earnings
ratio ignores assets and liabilities entirely. The counter to this
argument is that earnings are a function of assets and therefore
counting the value of assets and earnings twice is double
counting.
I agree.
But the P/E ratio also ignores debt. And as we saw in Chapter
2, this is a big mistake. Occasionally in bankruptcy, what was
once a multi-billion dollar company will sell for the princely sum
of $1. The one dollar is just a token amount because the real
cost of the business is the assumed debt.
If the company has $15 billion in debt (and no cash) the real
cost to the new buyer is $15,000,000,001.
However if the company selling for $1 has $15 billion in
debt and $5 billion in cash. The real cost to the new buyer is
$10,000,000,001.
In other words the real cost of any company is:
20
Purchase Price + Debt Cash
Many professional investors on Wall Street still make multi-
million dollar decisions based on the price of a stock being just
the market capitalization (purchase price). You know better.
So what can we do with this knowledge? It can be used as a
more accurate version of Price in the numerator of the price-
to-earnings ratio.
But what about the denominator Earnings?
I also have a problem with Net Income being used as a
companys fgure of earnings. This part is going to get a little
more complex as we look under the bonnet of GAAP accounting
standards. Read along, because Im going to try and make it
simple but remember you dont need to fully understand any of
this.
Wall Street often refers to the true earnings of a company as
Net Income. This is the proverbial bottom line, the ultimate proft
left after all costs have been removed from revenue.
The problem is, like anything in fnance, it is not an exact fgure.
If your son or daughter operates a lemonade stand on a hot
Sunday afternoon, calculating proft at the end of the day is
easy. Your fgure will be exact.
But multi-billion dollar companies are complex beasts, with
thousands of employees, millions of transactions, hundreds
of products, warehouse after warehouse of unsold inventory
and years of overlapping inventory purchases, customer sales,
servicing of product warranties etc.
The ultimate proft a company reports (Net Income) is an
accountants best guess at the proft the company generated
during the reporting period.
Whats worse, GAAP accounting standards (under which
all US public companies operate) have some rather unusual
rules. They use what is known as accrual basis accounting as
opposed to cash basis accounting.
When your son or daughter operated a lemonade stand, you
calculated the profts on a cash basis. This is why you came up
with an exact fgure. They sold $150 worth of lemonade, spent
$65 on ingredients, and fnished the day with cash profts of
$85.
On the other hand large, complex companies operate under
accrual basis accounting. This accounting smooths out profts
so that revenue and proft is earned when incurred and NOT
when the cash changes hands. This may seem like a small
point, but it has far reaching consequences.
Consider the case of a small company that rents out cars & vans.
In Year 1, they have nothing but $50,000 in seed capital to start
their business. They spend it all on 5 cars and 5 vans. They
rent out the vehicles and earn $10,000 in revenue throughout
Year 1.
On a cash basis, theyve made a loss of $40,000 (Spent
$50,000 and made $10,000). But on an accrual basis theyve
made $5,000 (the accountants best guess at their net proft).
The Reason is Depreciation.
Under accrual accounting, instead of assigning the entire
$50,000 cash outlay to Year 1 as a lump sum expense - $45,000
is added to the balance sheet as an asset (It is capitalized
instead of expensed).
21
The other $5,000 is expensed onto the income statement
accounting for the wear and tear the vehicles suffered through
one year of daily use.
Even with a business this small the net income ($5,000)
is an accountants best guess at the companys proft. At
a depreciation rate of $5,000 per year the accountant has
guessed the vehicles will have a working life of 10 years. After
which they will be worth nothing.
The accountant could easily have instead guessed the vehicles
will have a 15 year life or even a 5 year life. Each different
assumption would change the cost (Depreciation) shown on
the income statement.
If the vehicles were depreciated as if they had a 5 year life,
depreciation expense in Year 1 would be $10,000 Leaving the
company with a net income of $0, instead of $5,000.
I appreciate Im probably boring you, but I do have a point.
We need to adapt the earnings side of the ratio from the
accountants version of earnings to the cash earnings, which
can be higher or lower but presents a more accurate picture of
a companys true earnings.
Heres the fgure we use:
EBITDA Maintenance Capital Expenditures
EBITDA stands for Earnings Before Interest Taxes Depreciation
& Amortization. It is calculated as:
EBIT + Depreciation + Amortization
(EBIT is shown on every income statement on its own line, it is
net income with interest & tax expense added back.)
Now, some of my sharp business-minded readers may have
some questions. How can you simply add back those expenses
to net income, usually creating a higher true income fgure.
After all interest and taxes are very real expenses of doing
business.
The answer is, I dont recommend using this fgure to represent
the earnings of a business on its own. I only recommend it for
use as the Earnings in our adapted price-to-earnings ratio.
For calculating a companys true earnings (other than in use
with Enterprise Value) I recommend a measure called Free
Cash Flow. Which is simply Net Income + (Depreciation &
Amortization) Maintenance CapEx. The difference being
Net Income is after tax and interest expense, whereas EBIT is
obviously before.
Heres why we use the former for the denominator of our ratio:
Recall that in the ratio, instead of using Market Capitalization
as the price of a business were planning on using an adapted
version. The adapted version is:
Market Cap (price of business) + Debt Cash.
This fgure is known among investors as the Enterprise Value
or Total Enterprise Value. It is the real cost of buying a business
taking account of debt and cash. After all if you buy an entire
business you assume the debt and can pocket the cash. Buying
one share is no different - you own a fraction of the cash, and
assumed a fraction of the debt.
Quick Example: If a company has a market cap of $100m you
add on the debt ($900m) giving you $1 billion, you then deduct
22
the cash ($200m) giving you an enterprise value of $800m.
Because youve added back the debt, you will have no interest
expense. It is as if you bought the entire company for $100m
then used $700m of your own resources to pay off the companys
debt.
We also add tax expense back to earnings because were
valuing the business as the cash cost of the business to the
pre-tax cash fow generated. Companies can have different
tax rates, and since the tax rates change almost every year
comparisons using pre-tax earnings are on a more equal footing.
Besides if a company has lots of debt, a majority of pre-tax
earnings will be spent servicing the debt (interest expense)
This would reduce tax expense considerably (unfairly favoring
irresponsibly leveraged companies).
Technically EBIT is a version of earnings which is capitalization
structure neutral. Whether a company is funded with lots of
debt, or no debt at all The EBIT is the same because interest
expense has been added back.
Ok, But Why Add Back Depreciation?
Good question. As well as adding back interest and tax
expense, my version of a companys earnings also adds back
depreciation & amortization. Weve established Depreciation is
the spreading out of expenses that could have happened 20
years or more ago.
Wall Street loves to tout EBITDA as the fgure that should be
used for a companys earnings. The reason is that EBITDA
is always much higher than Net Income. But depreciation of
assets is a very real expense; my problem with depreciation
is that it includes an accountants best guess at the life of the
assets being depreciated.
My adapted version of earnings adds back Depreciation
& Amortization expense but then deducts a fgure called
Maintenance Capital Expenditures.
Swapping depreciation expense for maintenance capital
expenditures changes the companys earnings from the accrual
basis to the much more accurate cash basis.
Coming back to my vehicle rental company, depreciation
expense is the $5,000 a year being expensed out of the
$50,000 investment in vehicles. The problem is this $5,000 is
not actually a cash expense; the cash was spent long ago (in
Year 1) and this $5,000 expense is accounting fction.
Maintenance Capital Expenditures are the expenses required
by a company to keep Property, Plants & Equipment in operating
condition. In terms of a vehicle rental agency, this expense
would represent all the maintenance & repairs on the vehicles
and eventually vehicle replacements too.
This is the real cash cost of wear & tear (repairs & replacements)
as oppose to the accountants depreciation fgure.
Yet again though, there is a problem.
Many companies report their maintenance capital expenditures
expense somewhere in their flings. The problem is some dont,
and this fgure has to be either guesstimated or hardworking
investors could call management and ask for the fgure.
My explanation of the accounting logic above was to cater for
my more advanced readers. In most businesses Depreciation
& Amortization is a good proxy for Maintenance Capital
Expenditures. (It tends to be businesses in decline that are
23
spending a much lower amount on capital expenditures and instead choose to milk the business for cash fow.)
In which case, you simply use Earnings Before Interest & Taxes (EBIT).
Therefore the ultimate price-to-earnings ratio to use is:
Total Enterprise Value / EBIT
Heres a comparison of the common P/E ratio to our adapted fgure.
Price-to-Earnings Ratio Adapted Price-to-Earnings Ratio
Market Capitalization
Net Income
Market Cap + Debt - Cash
Earnings Before Interest & Taxes (EBIT)
Ill say it again, you shouldnt use EBIT as a measure of earnings. It is an infated version of earnings. Were using it here because our
numerator (Enterprise Value) is also infated due to the added cost of paying off the debt.
Again, I know what youre thinking. Youre thinking this has all gotten too complex with all this accounting mumbo-jumbo and youre about
to throw this report on the back burner.
Dont Worry, You Dont NEED to Know Any of This!
You can punch in any stock ticker on Yahoo Finance, (http://fnance.yahoo.com) and simply click on Key Statistics in the left hand
column. This page provides a whole host of ratios already pre-calculated for you with one being Enterprise Value / EBITDA (this wont be
too far from our preferred Enterprise Value / EBIT).
Or alternatively, just grab Enterprise Value (also on this page) and divide by Earnings Before Interest & Taxes (a line item on every
companies income statement.)
24
25
We now have the real multiple of earnings the business is
trading at. Coca-Cola (KO) trades at:
$132.6bn / $9.3bn = 14.3
Youll need to pay 14 x earnings to buy Coca-Cola. This is a fair
price, buying into companies at a fair price will not make you
rich unless the company is about to enter a growth stage. The
next chapter will teach you how to use this ratio to fnd out if a
stock is cheap, expensive or fairly priced.
26
In Chapter 4 I explained how to work out the current price of
any stock. This is of course not simply the dollar amount each
share trades for since a stock can be cheap at $100 per share
or expensive at $2.
To see the real cost of a stock, you need to relate this dollar
amount to what you receive. The last chapter taught you about
my adapted price-to-earnings ratio (EV/EBIT). The $100 stock
could trade at just a 4x multiple of earnings if EBIT is $25 per
share. Likewise the $2 stock could trade at a 40x multiple of
earnings if EBIT per share is $0.05.
This multiple, be it a cheap 4x earnings or an expensive 40x
earnings, is the sticker price of the stock. i.e. All else equal,
you can make an investment with a payback period of 4 years
or 40 years. This is why the price you pay is so important. You
could be exactly right about the next big growth stock but if you
overpay you could end up with a capital loss.
This brings me to an important point:
Never Count on a Greater Fool!
When you buy a stock at a high sticker price, such as a 30x
multiple of earnings. Youre investing using the Greater Fool
Theory of Investing. i.e. Youre hoping an even bigger fool than
yourself will come along and buy your shares from you at an
even greater price.
This is akin to overpaying for a 2006 Ford Mustang, promising
your spouse it is a valid investment and trying to sell it on to an
even bigger idiot at an even more ridiculous price.
It may work occasionally. But if you do it again and again your
batting average will be a loss.
This is why:
You Never Pay a Fair Price
So weve established the multiple of earnings as our yardstick.
This is the sticker price by which youll decide whether to buy
shares or not. The next step is to fgure out what a fair multiple
of earnings would be to acquire the stock in question.
A Fair multiple of earnings depends on industry, risk, growth
prospects, regulation, proft margins, operating leverage,
cyclicality and a whole host of other factors. Because of this
fguring out a fair multiple is also a hard task.
But this is another best guess scenario. Being approximately
right, most of the time is all you need.
Heres how to do it:
Lets say youre deciding whether or not to buy a recently spun-
off fast food franchise. This chain is called Everythings Kosher
(EKO) and specializes in Kosher chicken fast food.
Predictably immense selling pressure after the spin-off has
forced EKO from $9 per share to $4. At $4/share EKO is selling
at a sticker price of 6x earnings. Considering the company has
grown at a clip of 12% per year for the past 4 years and is about
to expand you believe youve struck gold.
Chapter 5 Why You
NEVER Pay a Fair Price
27
The best way to be sure is to check EKOs price-to-earnings
multiple against those of its industry peers. After all the stock
market correctly values most companies and so checking a
prospective bargain against its peers is a good litmus test.
This is where my adapted price-to-earnings multiple comes
in. If, like many Wall Streeters you attempted to compare
companies by their simple P/E ratio, the results would be far
from fair. Companies with lots of debt would look much cheaper
than they are, while conservative all-equity companies (the
good ones) would look expensive.
By using our equation, as taught in Chapter 4:
Total Enterprise Value / EBIT
You can instantly compare companies on an equal footing.
Because youre removing the effects of different capitalization
structures (different levels of debt to equity). This comes in very
handy.
Lets say you look at 4 companies from the fast food industry
and come up with the following:
McCluckins Corp Big Burger Dixy Chicken Mondo Burger
9 5 16 11
Average Sticker Price = 10x Earnings
The stock market is valuing the average fast food business at
10x earnings. Considering Everythings Kosher sells at just 6x
earnings, the stock is trading at roughly a 40% discount to its
peers.
This 40% discount is called:
The Margin of Safety
Bad things happen. Businesses go through rough periods, just
like entire economies go through cyclical recessions.
Theres no way of knowing exactly what will happen in the
future, so the best way you can protect yourself is by only
buying businesses at prices that include a margin of safety.
This 40% margin of safety achieves two things:
It protects you if things go wrong. Since the company is 1.
already valued as if things will go badly (6x earnings) even
if things do take a bad turn there isnt much lower the stock
can go.
Secondly, in the long term as an investor you can only ever 2.
earn the same return as what your company earns. That is,
unless you invest with a margin of safety. In the long term
stocks trade at their true value, by buying at a 40% discount
to true value your stock will usually rise to true value within
the course of 12 months (sometimes 6 months or less).
Your overall return on an investment will come from the stock
returning to true value (40% gain) and any growth in income that
happens during your holding period (10% growth is average).
As you can see, most of your return depends on how big a
bargain you can get. Investors who buy shares without a Margin
of Safety, at a fair or expensive sticker price are counting entirely
on future growth for their return.
The genius of this investing strategy can be summed up in
these two joint realities:
The bigger the discount to true value, the lower the risk. 1.
28
The bigger the discount to true value, the higher the return. 2.
Top colleges the world over teach that risk is linked directly to
reward. In other words the greater risk an investor is willing to
take on, the greater their reward. They apply this mindset to
investing in the widely accepted Effcient Market Hypothesis.
EMT is essentially the idea that at all times stocks trade at their
true value.
EMT further states that at any one point in time a stock price
refects all public information about the company. And prices
instantly change to refect any new public information that is
released.
In other words, EMT says dont bother trying to pick stocks
because no matter how good your research, you will fare no
better than someone who picks stocks at random.
On the surface it sounds plausible. But as well see in a moment,
to anyone but an academic this logic is obviously fawed.
You see a corner stone of EMT is Beta. Academics tell us
that the risk of any stock is its Beta. The Beta is simply a value
calculated from a stocks price volatility. If XYZ stock has a beta
value of 1, it means it is as volatile as the whole stock market.
If ABC stock has a beta value of 1.4, it simply means the stock
is 40% more volatile than the market.
Heres why EMT and Beta is so fawed:
Imagine youre about to buy a local restaurant for $200,000,
earning $20,000 a year. Youve done your sums but youre still
carefully considering the investment. Meanwhile the owner of
the restaurant needs the money urgently to pay for a family
members life-saving heart surgery.
After a few days the restaurateur calls up and says Ill cut my
price to $150,000 but I need you to sign the contract today!
Its obvious at $150,000 the restaurant has just became a
better investment. It now costs just 7.5x earnings instead of 10x
earnings. I mean, come on Who could possibly refute that?
At the lower price you have less downside risk and a higher
return on investment.
But
Imagine this restaurant was publicly traded - When the market
cap suddenly dived from $200,000 to $150,000 the Beta value
actually increased. i.e. The academics theory of investing would
today advise you the restaurant is a riskier proposition at this
lower price.
Remember the price of the restaurant dived because of an
outside infuence The owner needed to sell quickly for personal
reasons. When stocks dive in price, like private businesses
often there is a good reason. But occasionally there is not, a
stock could equally dive because a large owner is unloading
his position.
Bottom Line: Academics observed that the stock market was
frequently effcient. This I agree with Most cheap stocks
are cheap for a reason. But academics went on to conclude
incorrectly that the stock market is always effcient. The
difference between the two propositions is night and day.
The strategy detailed in this report is to look for stocks that are
priced ineffciently by the market, buy them and patiently wait
until the market fnally revalues the stock effciently.
How Big of a Margin of Safety?
29
Your margin of safety (i.e. the discount from a fair price) should
be as big as possible. But at the minimum you should demand
a 30% margin of safety. I would only use a 30% discount when
investing in a good company which I strongly believe will
continue growing. In this case, the margin of safety will come
from future growth.
For businesses with volatile earnings or high debt loads a 50%
or better discount is required.
For most companies somewhere between a 30% MOS and a
50% MOS is acceptable.
30
Martha Stewart went to jail for insider trading. But spin-off
investors can get great tips from insiders without doing anything
illegal. After looking at the earnings record of a potential spin-
off investment the place I look next is insiders compensation.
(By the way insiders are company offcers, i.e. management)
The thing about capitalism is that it works. If insiders are
heavily compensated to make the spin-off company work,
it has a much better chance of being a good investment. If
insiders of the new spin-off receive restricted stock or options
or warrants to buy more Im instantly more interested. The
more compensation, the better.
Dont make the mistake of under-estimating this factor. With no
incentives management of the new spin-off can happily plod
along making modest profts (or even losses) and still collect
their huge salaries. But with the prospect of making millions of
dollars each by raising the share price Management suddenly
becomes laser focused on making things happen.
Charlie Munger is Vice-Chairman of Berkshire Hathaway,
Warren Buffetts famed investment company. Munger is not
well known like Warren, but he is also a billionaire and equally
smart. Heres what he has to say on incentives in investing:
Well I think Ive been in the top 5% of my age cohort all my
life in understanding the power of incentives, and all my life
Ive underestimated it. And never a year passes [without me]
getting some surprise that pushes my limit a little farther.
Federal Express is one example of a company using incentives
to make billions. It has to transport packages within its network
to a central location for sorting before sending them on to their
fnal destination.
For the system to work, the sorting must be quick and effcient.
The trouble was that, for a time at least, it wasnt. The company
tried all sorts of incentives without much success. Then
management came up with the idea of paying their staff by the
shift, instead of for the shift. In other words, when the sorting
was done the staff could go home. As you can guess, along
with the staff at the end of their shift, the problem vanished
almost immediately.
All the information about how much incentive (stock, options,
warrants etc.) insiders have to make the stock price rise
is included in SEC fling Form 10. Dont worry if that means
nothing to you, I have an entire chapter covering these nitty-
gritty details coming up.
Chapter 6 Insider
Trading that is Perfectly
Legal
31
The best way of learning the nuts & bolts of this stock market is
loophole would be by sitting next to me in my offce as I search
for and buy stock market bargains. Since I intend to distribute
this report widely, unfortunately this is unfeasible.
Instead Im going to give you two examples of different spin-offs.
My frst example is of a spin-off homerun (200% gain) while my
second is an example of the more normal spin-off opportunity
(50% gain). My aim is to bring everything Ive taught you to life
in this chapter.
Case Study #1: Marriott International spins off Host
Marriott
For years Marriott Corporation expanded their empire by
building huge numbers of hotels. However the cream of the
Marriott empire was not in owning hotels, rather it was in
managing hotels owned by others. Their strategy (which was
very successful) was to build hotels, sell them but have it written
in the contract that Marriott will continue to manage the hotel at
a preset fee.
When everything in the real estate market suddenly hit the fan,
Marriott was stuck with a load of unsalable hotels and billions
in debt which was used to build them.
Then came along a man called Stephen Bollenbach. Bollenbach
had just come away from helping Donald Trump turn around his
casino business when he was hired as Chief Financial Offcer
at Marriott. Bolleanbach had an idea, a great one.
Bollenbachs big idea was to leave all of the unsalable hotel
properties, low growth hotel ownership business along with
all the companies debt in one company Host Marriott. And
spin-off the highly desirable hotel management business,
pretty much debt free into a new company to be called Marriott
International.
According to the plan, Bollenbach would become the new CEO
of Host Marriott. And Marriott International (the good Marriott)
would be required to extend a $600-million line of credit to Host
Marriott in order to help with any fnancial problems.
No extensive research was required to uncover any of this, it
was all laid out in a number of different articles in The Wall
Street Journal (and many other business newspapers).
So in effect, in one fell swoop this attractive hotel management
business (Marriott International) was about to shed billions
in debt and a load of tough-to-sell real estate. A side effect
of creating this business powerhouse is dumping all of the
unwanted toxic waste in a new company, Host Marriott.
Obviously for us spin-off investors the exciting part was the
toxic waste. With Marriott portraying the spin-off as throwing a
load of waste overboard - who was going to want to buy it? No
one, no investor be it a Wall Street fund manager or individual
is going to want to own Host Marriott. The selling pressure will
be even greater than a normal spin-off, creating an even bigger
bargain.
Chapter 7 Real
Examples of Loophole
Profts
32
But, how can you be sure it isnt what everyone thinks, a problem
child business saddled with debt and unsalable assets
The Insiders!
Ive already told you the insiders is the key area to look at
when deciding whether or not to invest in a spin-off. The more
incentivized the insiders are, the more likely the spin-off will be
a homerun (think double or triple) rather than a mere 40% or
50% return. When insiders are on your side rather than merely
taking a wage things run a lot smoother.
In the case of Host Mariott, Stephen Bollenbach, the architect
of the plan, was to become Hosts chief executive. It struck me
as strange that the man who had saved a sinking ship (Marriott)
would voluntarily jump overboard into the sinking lifeboat, Host
Marriott.
Great idea Bollenbach management would say I think youve
just about saved us! Now once youve fnished throwing that
real estate and debt overboard, why dont you toss yourself
over too! Pip, pip. Use that old lifeboat if you want. Cheerio!.
It could be that way, exactly as things appear on the surface. Or
it could be that since no one really cares about Host Marriott,
Bollenbach could be entitled to a hell of a lot if he can make
the company work. As always, the more incentive this fnancial
whiz has, the better.
So how did things work out?
Everyone and their mother sold Host Marriott just about as
soon as they received their shares. Host Marriott may not be a
rockstar company, but its worth something And the immense
selling pressure pushed the stock to the levels us spin-off
investors dream about.
Whats more, nearly 20% of the stock was made available for
Bollenbach and the rest of his management team. A pretty
big incentive for them to make good things happen for Host
Marriott. And fnally, the debt situation wasnt half as bad as
people frst thought.
What happened to the stock price? Within four months of the
spin-off Host Marriott tripled in value. Had you invested $10,000
you had the chance to turn it into almost $30,000. Extraordinary
returns from a stock most viewed as toxic waste.
The Money Spends the Same
Whether you make easy profts investing in boring & undesirable
stock market waste, or the same profts gambling on exciting
gene splicing stocks that could go big The money spends the
same.
Case Study #2: Briggs & Stratton Spins off Strattec
Security
Briggs & Stratton, a manufacturer of small gas-powered engines
(used in lawnmowers, leaf blowers etc.) announced the decision
to spin off its highly proftable automotive lock division. At the
time, the automotive lock division represented less than 10% of
the parents total sales.
All of this made it the perfect spin-off opportunity. With the
parents market capitalization of over $1 billion it was included
in the S&P 500. Since the spin-off would have a market value
of under $100 million it was at a size totally inappropriate for
almost all institutional holders. Whats more index funds which
33
held the parent were almost certain to sell their shares.
It wasnt until a few months later that the company fled SEC
Form 10. This is the document with all the details of the
distribution and company to be spun-off. As always I frst looked
at what incentives would be provided to management to propel
Strattecs stock price.
In Strattecs Form 10, under the heading Reasons for the
Distribution the directors revealed the reason for the spin-
off. It was just what I liked to see. Strattec was being spun-
off precisely so that they could provide compensation to
management directly related to the performance of Strattecs
equity. Whats more management was reserving 12 percent of
the new companys shares for management incentives.
In addition to looking at insider compensation it is also advisable
to read the frst few pages of Form 10. The start is like the
introduction chapter to a lousy book. But it allows you to pick
out the bits of interest and focus your sleuthing in those areas.
But mainly you should be looking at management incentives
and pro-forma fnancial statements (more on this stuff later.)
According to Strattecs pro-forma income statement last years
earnings came in at $1.18. And for the latest six month period
earnings had increased 10% year over year. Unlike Marriott
this was not toxic waste.
I took a rough stab at calculating a fair value for Strattecs
business. Strattec is an original-equipment manufacturer (OEM)
for the automotive industry. In other words, they sell locks for
cars. Strattec was already the biggest lock supplier for General
Motors and Chrysler. But as an added bonus, deep in the Form
10 they indicated they were about to start supplying Ford too.
This gave a strong indication there could be good earnings
growth ahead.
Most OEMs in the auto industry trade at roughly 12 x their
annual earnings. At this price multiple, Strattec is worth $14.16
per share. But since Strattec has already shown 10% earnings
growth in the last 6 months and is on track to add Ford as their
second biggest client I fgured it was worth more than the
average OEM. At 14x earnings, Strattec would trade at $16.52
per share, this sounded about right.
The outcome? For many months after the spin-off Strattec
traded at $10 - $12 per share. Not a huge discount from fair
value, but the discount here was in addition to expected future
growth. With newly focused & incentivized management and
the addition of Ford as a new customer it was reasonable to
expect good things from Strattec.
Soon after the usual selling pressure subsided Strattec traded
up at $18 per share. A 50%+ gain in less than eight months.
Not too bad and fortunately, far from an unusual spin-off
opportunity.
34
In any one month there is usually just one or two spin-offs being
actually distributed to shareholders. Therefore fnding spin-offs
is not a hard task. You can use any of these methods:
Automatic Alerts: Possibly the easiest way of fnding out
about upcoming spin-offs is to setup an online alert service.
These services scan news websites and press releases for any
keyword you choose, on fnding a news piece containing your
keyword the service emails you a link.
All you need to do is setup a few alerts, for these terms: Spin-
off, Spin-offs, Spinoff, Spinoffs.
There are two services I recommend. Google alerts (http://
www.google.com/alerts), and GigaAlert (http://www.gigaalert.
com). Google alert is very basic, while GigaAlert has more
features to customize search criteria and delivery schedules.
One advantage of GigaAlert over Googles offering is that it
allows you to flter out entertainment websites, since spin-off
alerts are often triggered for television spin-offs.
SEC Web Site: The SECs website will be your main resource
for digging into the details of every spin-off. But it can also be
used to fnd spin-off opportunities. When a company is about to
go through with a spin-off they fle a form with the SEC called
Form 10. This form gives all the details of the spin-off, pretty
much everything youll need to know is in the Form 10.
By searching the SEC database for Form 10 submissions you
can fnd companies about to be spun-off. And within seconds
glance at their Form 10 to see if its something youll be interested
in. To get started searching go here:
http://www.sec.gov/cgi-bin/srch-edgar
In the search box, enter: form-type = 10-12b OR form-type=10-
12b/a (without the quotes), and choose the desired date range.
On the next page is a list of spin-offs, just click on the link [html]
and then again click on the very top link, i.e. the document
name for item 10-12B. This will bring up a very long, complex
document full of meaningless legalese. Well get to this later.
Heres a step-by-step guide to searching the SEC database for
Form 10 and then opening Form 10. (This should be easy but
somehow like all government agencies they manage to make
their website hard to navigate.)
Navigate to 1. http://www.sec.gov/cgi-bin/srch-edgar and
enter form-type = 10-12b

Chapter 8 Putting it All
Together. A Step-By-Step
Guide
35
2. This will bring up a list of all upcoming spin-offs, since every
company fles a Form 10 when about to spin-off a subsidiary.
Under the column Format click on [html] for the company
youre interested in.
3. This is the fnal step. On this page you just need to click on
the very top red link under the Document column. Thats
the link for item 10-12B which is the entire Form 10.
Thats it! The Form 10 will load in your web browser. After Ive
quickly scanned the document and know Im interested I usually
print it off for further reading.
Financial Publications: The absolute best fnancial publication
to read is The Wall Street Journal. The WSJ covers virtually
every spin-off at some point. And even if you fnd your spin-off
stocks via another method, reading the WSJs summary of the
situation is a good way to get up to speed without spending
hours wading through a Form 10.
Now you know all about spin-offs and the opportunity they
present, the articles covering these corporate events will jump
out at you.
Youve Found a Spin-off. What Now?
Once youve found a potential spin-off investment you should
frst look at SEC Form 10 (10-12b). This is the SEC fling
companies make when theyre about to spin-off a subsidiary.
Form 10 is always a very long document, with lots of boilerplate
legal risk warnings etc. that you neednt read.
There are some sections that are more important than others.
Only after reading the important sections and deciding that
a particular spinoff is worth more of your investigation time,
should you expand on your reading and do your due diligence.
So, what should you look at?
The frst section you should read is the Summary. In this
section, management summarizes what it believes is the
most important information about the business and the
distribution (the spinoff). After reading the Summary, you
should know more about the companys main business, the
industry in which it operates, have a basic understanding of
its fnancial standing, and learn of other signifcant details
36
pertaining to the spinoff.
The next section to look at is the Security Ownership by
Management. As the name suggests, this section lists
what managements interests are, and also the stakes of
other large shareholders (if any). As mentioned before, the
more incentives in the form of stock, options and warrants
management receive the better.
Finally you should read the Pro Forma Financial
Statements. The three important statements are, of
course, the balance sheet, the income statement and
the cash fow statement. These statements present
historical data as if the spin-off company operated
independently for some time (hence the Pro Forma).

Here you should be taking note of: Revenue growth or
decline, COGS (Cost of Goods Sold) growth or decline,
SG&A (Fixed costs like rent and salaries) and fnally you
should calculate a fair sticker price based on a multiple of
Enterprise Value to EBIT as shown in Chapter 4.
If the company is earning money and isnt coming up against
any operating problems (such as increasing costs, losing sales
to a competitor etc.) you should try and dig a little deeper.
Act like a journalist investigating a story; try to expand your
knowledge of the industry and company. Heres how:
The Companys Web Site: The parent companys web
site will often have a section that is dedicated to the spinoff
(usually under the investor relations link). This is especially
true for larger companies. In this section, you will fnd additional
information to the SEC flings. For example, you may fnd press
releases and a slide-show presentation that highlights the key
points of the separation.
One advantage of going to the companys web site is that the
information is usually organized in a logical manner. However,
be careful relying too heavily on these additional documents.
The company may choose to emphasize only part of the bigger
picture.
Investor Relations: Every shareholder is an owner of the
company. Therefore you have a right to call the investor relations
of department of any company and ask for more information on
anything youre unsure about. Whether you own 1 share or 5%
of the company this is your right.
Occasionally the investor relations department may shun small
investors. Heres what I usually do, ring up the IR department
and say something like this:
Hello, I have a few questions about Company X. I currently
own 50,000 shares but am considering doubling my position.
My frst question is about
Yes, alright youre telling a small fb. But as a prospective
shareholder its your right to know the full story. But, before
calling the IR department, make sure youve done most of your
research. Dont ask questions like Will next years earnings
be higher or lower than the last? rather ask questions like I
noticed the gross margin declined in the last quarter, is that due
to the seasonal product mix? How come the same quarter last
year had a much higher gross margin?
Your aim is to extract specifc bits of information that will help
in your analysis not receive fnancial advice. And remember
investor relations employees will usually be inherently bullish
on the companys prospects, ask for specifc information and
discard opinions.
Investing is Sleuthing
37
After a few hours of sleuthing you should have a decent level
of understanding about the spin-off company, its earnings and
expected future. At this stage you should be able to answer
questions like:
Is the spin-off actually earning a real proft (Check the pro-
forma EBIT)
Does the company have an acceptable level of debt
(Preferably less than 30% long-term debt to stockholders
equity.)
Does the companys EBIT cover the annual interest expense
at least twice?
Does management expect the company to continue growing,
sustain current market share or enter a period of terminal
decline?
How are the companies margins compared to its
competitors? All other things equal you want to buy high
margin companies, i.e. low cost operators. If the gross
margin is drastically lower, look for a reason other than bad
business. Maybe the competitor has lower variable costs
(COGS) due to offsetting higher fxed costs (SG&A) i.e.
operating leverage.
Remember valuing a business is not science. It is an art. There
are hundreds of questions I could ask and no robotic pattern.
Every business is different, and every industry will have different
factors you should focus on. In retailing you focus on same store
sales, in oil & gas it is reserves and expected future discounted
cash fow from these reserves.
Dont worry about reading every word of the SEC flings or
understanding every industry-specifc measure. As long as you
hit the main points (Spin-off details, management incentives,
pro-forma fnancial results) you can calculate both the sticker
price per share and fair price per share.
When the spin-off distribution is completed and the new stock
starts to trade under its own symbol. You need to calculate the
stocks sticker price. i.e. the multiple of price to true earnings
the stock is trading at.
Calculating the Sticker Price
You cannot make a buying decision on any stock before relating
its price to some kind of value. Vulture investors searching for
asset rich companies emerging from Chapter 11 may relate the
price per share (say, $5) to the Net Tangible Assets per share
(say, $12).
I personally prefer and advocate investing in good companies
without complicating problems. This means I only buy companies
with a strong and hopefully growing income stream. Because of
this, I relate the price per share to the (adjusted) earnings per
share.
Heres a reminder of the formula from Chapter 4:
Market Cap + Debt - Cash (Enterprise Value)
Earnings Before Interest & Taxes (EBIT)
Remember, you can use the above formula (which is easy to
use) or the slightly more complex version:
Market Cap + Debt - Cash (Enterprise Value)
EBITDA - Maintenance CapEx
The second version is the one I use, because occasionally the
accountants Depreciation & Amortization fgures (included in
EBIT) are far higher or lower than the level of maintenance
capital expenditures. One idea is to use the frst to pan for viable
38
investments (because its quick to calculate) and the second,
more accurate formula once youve found a stock you like.
The resulting number (Which could be as low as 4 or 5, or as
high as 30) is the sticker price of the stock. It is how much you
will need to pay to buy the companys earnings stream.
In the above formulas EBIT and EBITDA Capex is used to
represent the true earnings of a company. However, recall
from Chapter 4 that these measures are only to be used in
conjunction with the Enterprise Value. (Because Enterprise
Value includes the cost of repaying net debt, earnings should
not be penalized with interest expense which would not exist.)
My advice from Chapter 4 was to use Free Cash Flow (FCF) as
a standalone fgure for a companys true earnings. FCF is simply
Net Income + (Depreciation & Amortization) Maintenance
CapEx (i.e. true earnings after interest & taxes.)
To prove to you why FCF is much preferable to Net Income as a
measure of earnings, here is a quote from the most recent Kraft
Foods 10-K fling:
Free cash fow is an internal, supplemental measure of our performance.
Our management uses free cash fow as the primary cash fow metric in the
budgeting and forecasting processes, as it represents the controllable cash
fows from operations. We believe free cash fow shows the fnancial health of,
and how effciently we are running, the company. We further believe that this
non-U.S. GAAP measure provides information useful to both management
and investors in gaining an overall understanding of our current fnancial
performance, and that it provides investors with fnancial information that
most closely aligns to our internal measurement processes.
Kraft is an extremely honest and well-managed company.
Because of this they advocate a very raw measure of their
fnancial performance to investors. Free Cash Flow cannot
be manipulated or dressed up as GAAP net income can.
It is testament to the argument for FCF that when using it,
you are using what management use internally to rate their
performance.
Forgive me, I digress.
After calculating the sticker price (as shown in Chapter 4) you
need to fnd a fair multiple of earnings (Chapter 5) i.e. The
average multiple of earnings Wall Street values companies in
the industry at. A fair multiple will usually be no higher than 15
unless the industry is fast growing and has exciting prospects
ahead.
Note however that industrys as a whole can be overvalued
by Wall Street. If you were investing in dot-com ventures in
1999, an investor wearing blinkers may believe one dot-com
company is a bargain because it trades at 60x earnings while
the average dot-com trades at 90x earnings.
When investing you need to bring your common sense along for
the ride. You wouldnt make an investment in a private enterprise
with a payback period of 60 years. The fact a company is
publicly tradable and has a fashing price tag shouldnt change
anything.
I advocate comparing the P/E ratios of stocks with their industry
peers, but in addition to using common sense. Its obvious to
everyone that a company trading at 5x earnings is a bargain. If
somethings that cheap you neednt bother with a litmus test
Just make sure its not that cheap for good reason.
All that is left to do is decide on the price per share at which
you will buy shares in the spin-off. Take the fair multiple (i.e.
12x earnings) and apply an appropriate margin of safety (i.e.
40% MOS). This leaves you with a buy price of 7 x earnings or
better.
Now just sit tight and patiently wait. As the new spin-off comes
39
under immense selling pressure the stock price will decline massively from its initial price. This decline can happen over the course of 1
month or it can take as long as 4 months.
My rule is to buy as soon as shares come into my acceptable buying range. Dont try and time buying so that you buy at the very bottom,
you will miss out on a lot of good investments doing that. In this case, at an EV/EBIT ratio of roughly 7 x earnings you should start
acquiring a position.
Putting it into Practice, a Real Example
Heres a real example of me calculating the sticker price of Dell, inc. (DELL). Today DELL is trading at $12.07 per share. This fgure is
useless to us until we relate it to the earnings stream. You can get your fnancial data from many different sources: SECs Edgar system,
Company website, Yahoo Finance etc.
Once youre actually interested in a stock you really should go straight to the horses mouth (SECs Edgar Database). But until that stage,
it is much easier to use a fnancial website like Yahoo Finance. Heres a quick and easy way of calculating a stocks sticker price.
1. Punch in the ticker symbol on Yahoo Finance and navigate to the Key Statistics page. The page presents a whole load of fnancial
statistics for DELL, but were interested in: Enterprise Value and EBITDA.
40
41
2. Remember the sticker price ratio is:
Enterprise Value
EBITDA - Maintenance CapEx
We need one more item not provided by Yahoo Finance, that
is Maintenance Capital Expenditures. Unfortunately DELL
doesnt provide this fgure in their 10-K. Instead they state:
During Fiscal 2010 and Fiscal 2009, we spent $367 million and
$440 million, respectively, on property, plant, and equipment
primarily on our global expansion efforts and infrastructure
investments in order to support future growth.
Capital Expenditures come in two forms: Maintenance and
Growth.
Maintenance Capital Expenditures: Maintenance CapEx
for DELL would be spending on repairs and upgrades to
machinery that are required to keep output constant. E.g.
If Dell had a production capacity of 5 million PCs a year,
if they stopped all maintenance capital expenditures the
production capacity would slowly fall as different plants fall
into disrepair or become outdated.
Growth Capital Expenditures: These expenditures are
any which will drive future growth. In the case of Dell, any
buying of new plants or machinery that will raise production
capacity past 5 million PCs a year.
Unfortunately Dells management doesnt give any specifcs
on the relative amounts of maintenance vs. growth capital
expenditures. Though they do infer that most of the 2010 capital
expenditures were spent in order to support future growth, i.e.
growth capex.
Prior to any investment it would be advisable to call DELLs
investor relations dept and ask for some clarifcation on this
issue. But since were looking for a quick sticker price estimate,
just err on the side of conservatism. During fscal 2010, Dell
spent $367m on CapEx in total. Conservatively well estimate
80% of this was maintenance capex, i.e. $293.6m (This is
probably far too high since Dell themselves imply most of this
cash was spent on growth).
By the way, you can fnd out the total capital expenditures
amount from the cash fow statement on Yahoo Finance, its
under the second section of the cash fow statement (Cash
Flow from Investing Activities):
42
3. So we have all the information to plug into the sticker price ratio.
Enterprise Value
=
17.65bn
= 5.1
EBITDA - Maintenance CapEx 3.7bn - 293m
So weve found out that tech giant DELL is trading at just 5x earnings! This is primarily due to a large cash balance, and very little long-
term debt. This makes Enterprise Value far lower than the Market Capitalization, i.e. the real cost of DELL stock is lower than most
other investors believe. By sticking to the true cost of a company and the true earnings you have yet another edge over the average
investor.
43
This is one of the reasons I like DELL as a potential invest-
ment right now. At 5x earnings DELL is priced as if its headed
for trouble.
Why is Dell So Cheap?
Apple has recently experienced remarkable success with the
advent of the iPad. Dell is meanwhile seen as a little old-hat
especially since their recent iPad competitor the Dell Streak
was a huge fop. Whats more they just settled with the SEC for
$100m on some accounting charges which wont have helped
things.
Still DELL is a tech giant producing a lot of Free Cash Flow.
Their prices are very competitive and they have excellent man-
agement (Michael Dell). At a 5x multiple of cash expense to
cash earnings, I believe its a screaming buy.
Heres something to note: Youll notice we used the slightly
more complex version of the sticker price formula. This was
especially important in valuing Dell.
As a late-stage company Dells 2010 depreciation charge (a fc-
tional, non-cash expense) was $850m. Meanwhile even a con-
servative maintenance CapEx (true depreciation expense) was
just $293.6m. This disparity means accountants Net Income
(the fgure Wall Street relies on) is being unfairly punished with
high depreciation expense.
Because of this, in this instance the simpler sticker price ratio
is inaccurate:
Enterprise Value
=
17.65bn
= 8.5
EBIT 2.063bn
The earnings (EBIT) is unfairly punished with a high deprecia-
tion charge which in reality does not exist. You may fnd this a
lot with mature companies, at a late stage capital expenditures
are reduced producing lots of Free Cash Flow Meanwhile
the earnings are still being punished for all the huge capital
expenses incurred in building the business.
44
Ive left this Chapter till last for two reasons:
I have no good answer to the question When do I sell?
If you follow the strategy laid out in this report, and you make
sensible and rational buying decisions based on buying
bargain stocks. You make a proft before you ever sell your
shares. You swap one lower value currency (your cash) for
a higher value currency (shares of a bargain stock).
Put it this way, ABC Widgets Inc. is a proftable widget maker
earning $1.40 per share. Using the strategy laid out before, you
roughly value ABC Widgets at $14 per share (10x earnings).
If ABC widgets is spun-off and subsequently comes under
immense selling pressure it could feasibly fall to $7 per share.
Due to this faw in the spin-off system, youre able to swap every
$0.50 you invest for approximately $1 of value. After youve
invested youre extremely patient and pretty much forget about
the investment, just making a point of reading the quarterlys
(SEC fling 10-Q) as they come out.
You then only sell for one of two reasons:
A quarterly, annual or other fling (10-Q, 10-K, 8-K
respectively) announces some kind of big change for the
company or industry. And importantly, you perceive this
change to have destroyed more than 50% of the companys
value. (i.e. the event has wiped out your margin of safety,
this is very rare).
The spin-off emerges from the period of immense selling
pressure and rises to somewhere near the $14 fair price
target. Selling early at say $11.50+ and redeploying your
capital in another more undervalued spin-off may be a
prudent strategy to consider. (Thankfully when investing in
spin-offs, this outcome is very common.)
It is massively important you do not get scared out of your
position. If you buy a stock at $7 and it subsequently falls to
$4 it is not automatically a bad investment. However getting
scared and selling at $4 will make it a bad investment.
Take a look at press releases, 8-K SEC flings etc. and try to
establish if value has been destroyed. If it hasnt, hold your
position or consider buying more shares at this even bigger
discount.
The Beautiful Thing about Spin-offs
The truth is you can buy bargain stocks from all corners of the
stock market. 52-week low lists, stocks which are in regulatory
trouble etc. And I am a strong advocate of searching high and
low for stock market bargains, not just in the corner of spin-
offs.
But spin-offs have one HUGE advantage over other bargain
stocks.
If a regular stock is very cheap (e.g. 60% margin of safety) you
need to look for a catalyst something which will unlock the
hidden value and force the stock market to revalue the company.
I said before in the long term stocks always trade at their true
value, this is true, but by long term I mean 1 3 years.
All spin-offs come with a strong catalyst just because theyre
spin-offs. When the immense selling pressure subsides because
Chapter 9 When to Sell
45
everyone who wanted to sell, has sold It is only natural for the
stock to quickly bounce up to its true value. And usually the
selling pressure subsides in roughly 3 4 months.
This means after 4 months you can sell your spin-off shares
at a 50% proft and redeploy the capital in one or even two
more opportunities before the year is over. The compounding
(reinvesting of your initial capital + new profts) will go a long
way to making you rich rather than just someone with a well-
managed investment portfolio.
In conclusion:
If you take away only one thing from reading this entire report,
let it be this: Dont buy a stock because you think it will rise in
price, buy because in todays terms you strongly believe youre
receiving $1 of value for every $0.50 you invest.
When buying stock market bargains youre often buying
boring & unloved companies. Youll be seen as a stoic and
boring investor. But buying shares in an unloved company is
like buying shares in Adolf Hitler. Theres not much you can
say about Hitler to reduce his reputation further. Hes about the
most hated person imaginable.
Likewise stock market bargains are often so cheap (5-6x
earnings) even the revelation of some big unexpected scandal
will scarcely lower the stock price. After all, if the stock gets any
cheaper (4x earnings?) its likely to be a buy-out candidate.
On the other hand, the slightest piece of good information
indicating a slightly rosier picture of the future will often send a
bargain stock rocketing. For a company priced as if doomsday
is coming up, even a very slight increase in sales or margins
could lead to a 30% rise. The rule is Watch the downside and
the upside takes care of itself.
This is because
You Pay a Lot for a Rosy Outlook
It costs a lot to buy stocks everyone likes. Makes sense right?
If everyone thinks the future of a certain stock will be great the
price is bid up and up - Often to a level where even the best
outcome wouldnt move the stock any higher.
Investors who buy the popular stocks (like followers of Cramer)
pay dearly to have the crowd behind them.
Let me put it this way. Most people who make money in real
estate buy fxer-uppers. The reason is by fxing up a run down
house or apartment complex your proft comes from the value
you added by fxing it up. And when buying a run-down place
you know youre getting a bargain and importantly you know
why its a bargain.
Your proft in this case comes from two areas: The value you
added by fxing it up and any general increase in real estate
prices in the area.
On the other hand, some people invest in real estate in good
presentable condition. Its the nicer, cleaner way of doing things.
No real work is involved and everyone will immediately tell you
the house is lovely and you made a good investment.
But in the latter case, you best be damn sure you picked a good
area to invest in. Because your proft is solely derived from
the general increase in real estate prices in the area. There is
no safety net because you cannot add value to the property
yourself.
46
Likewise if you invest in popular stocks and you inevitably pay
a fair price or worse a high price. You better be damn good
at predicting the future because you absolutely need things
to go great to make a return. Since some expected growth
was already priced into the stock you need growth above and
beyond the expected growth to fuel your return.
For me, this is no way to invest. I like shooting fsh in a barrel. I
dont want to invest in a company and keep my fngers crossed
every time earnings are announced. I dont want to worry theyll
miss expected EPS by a few cents and the stock will dive. If I
wanted the thrill of gambling Id go to Vegas, I invest to make
small but reliable gains not to luck out on the next Microsoft.
47
In this report Ive boiled down my investing strategy into a
methodical, logical plan that anyone can follow. However, lets
say my report has got you really fred up about investing. Not
only do you want to put what Ive taught you into practice, you
want to further understand the logic and reasoning behind my
strategy. Perhaps you even want to adjust part of my strategy
to ft your worldview.
A basic level of fnancial statement knowledge will make
EVERYTHING easier. It will take just a week or so of reading to
grasp these basics and heres the book I recommend:
Financial Statements Demystifed: A Self-Teaching Guide
Once youve read even the frst few chapters of this book, the
strategy I present in this report will become much clearer. Youll
understand why we adjust earnings instead of just accepting
net income, and why taking account of debt and excess cash
is so important.
Already have a basic level of fnancial knowledge?
The next book is much more advanced. And youll need to
have a strong grasp of fnancial statements to follow it. But
this book is the holy grail. The whole book is dedicated to one
topic Uncovering Sustainable Cash Flow. While at frst this
may seem a small and insignifcant point, if you can calculate
the sustainable cash fow a company is generating the rest is
easy.
For the most part cash cannot be manipulated. Had investors in
Enron adjusted GAAP earnings to the cash reality They would
have quickly seen Enron was consuming cash, not producing it.
Investors believed they were getting wealthier each year since
Enron was generating billions in GAAP earnings. In truth had
one person owned Enron, running the company would have
been an expensive hobby. This GAAP to Cash adjustment
didnt prove the fraud, but it did prove something was amiss.
Cash is king; this phrase is never truer than when applied to
investing. The kid who operates a lemonade stand knows he
made a proft because he has more cash at the end of the day.
Likewise businesses proft when they have more cash at the
end of the year. Often looking at cash fow uncovers the ugly
truth that business profts are sporadic. GAAP accounting is
designed to smooth over cash earnings giving the appearance
of stability.
Investors relying on net income will always have a niggle in
the back of their mind. The unsettling thought that perhaps
last years earnings were a fuke and came from some one-
time source or manipulation. Many companies have low quality
GAAP earnings; were not just talking about outright fraud here.
If you know exactly how to adjust earnings to the cash reality
You have a huge edge, even over most institutional investors.
My obsession with cash fow is not to catch the odd Enron. After
all, such frauds are so few and far between you may as well
ignore the risk. No, Im obsessed with cash fow because
Even in a company where no fraud or deception has taken
place net income could be $200m while the real, cash earnings
could be $300m. This kind of difference will greatly affect your
investing decision. Many stocks will have this kind of dramatic
difference between the real cash earnings and GAAP net
Chapter 10 Further
Reading
48
income.
Heres the bible of cash fow analysis:
Creative Cash Flow Reporting: Uncovering Sustainable
Financial Performance
(Note for Advanced Readers: In this report Ive used earnings
+ depreciation as a proxy for cash fow. Even this is not the true
cash earnings, because to properly convert GAAP earnings
from accrual to cash you need to account for changes in
working capital accounts. The above book explains everything
and I cannot recommend it enough.)
Once you have a good grasp of fnancial statements youll want
to start reading about the art of investing. What makes a good
company, what will drive future growth etc. These books are
often written by famed investors and are a much lighter read
than the above mentioned accounting books.
Heres one of the best:
One Up On Wall Street : How To Use What You Already Know
To Make Money In The Market
49
What if I told you there was another stock market loophole I
use to fll my pockets with cash. And unlike investing in spin-
offs this loophole is virtually risk free. The name of the game is
Merger Arbitrage and heres how to play it:
Lets say a merger is announced between two public companies,
Company A is acquiring Company B for $11 per share in cash.
Immediately after the announcement the stock price of Company
B will jump to somewhere near $11, this makes sense, since
soon youll be forced to sell your shares for this amount.
But the thing is, Company B never sells at exactly $11 Who
would want to buy stock for $11, only to sell it later for $11
and incur brokerage commissions on the trade. Occasionally
Company B stock will sell for $9.50 or $10 even when the
merger is almost a done deal.
Here Lies Your Opportunity
You can buy shares in Company B for $10, wait a few weeks
or months for the merger to close and make 10% on your
investment with almost 0 risk. The spread between $10 and
$11 is the risk premium, i.e. the risk that the merger wont go
ahead and youll be left with Company Bs stock which may
only be worth $8 per share.
The trick is to only engage in merger arbitrage when youre
almost 100% sure the merger will go ahead.
The actual proft in merger arbitrage (10% here, 5% there) may
appear quite small. Because its a little like looking for parking
meters with some time left on them. The proft is small, but its
almost risk free if you follow my rules and its actually quite
fun.
In general, the steps of a merger go like this:
Due diligence by both parties; 1.
Agree on a price, terms, and contingencies (fnancing, 2.
regulatory approval);
Get preliminary shareholder sentiment (or controlling 3.
shareholder approval);
Secure fnancing arrangements (if needed); 4.
Obtain regulator (SEC, FCC, any and all) approval; 5.
Get fnal shareholder approval at a meeting called for that 6.
purpose;
Complete the deal. 7.
After step 5 is usually when I buy into a merger arbitrage
situation. All you need to do is a little due diligence to make sure
steps 6 & 7 arent going to spoil the party (stop the merger).
The Goal of Arbitrage
In arbitrage, the goal is to earn high rates of return on an
annualized basis in low-risk, high-certainty situations. I look
for done deals that are mis-priced due to other peoples fear.
When would a 5% return satisfy me? When I can get it in a few
weeks. If we have gotten past Step 5 and there are two or three
months to go, I want to see a 10% spread between the current
Bonus Chapter #1 Risk
Free Profts via Te 2nd
Loophole
50
price and the merger or acquisition price.
If the merger or acquisition (or going private) transaction is more
than three months out, it likely hasnt gotten past Step 4 or 5
and is better left for the degenerate gamblers of Wall Street.
Just Say No.
Merger Arbitrage is meant to be a virtually risk-less way of
making money. Lets dive in with that in mind.
I believe that it is human nature for people to want to proft on
anything and everything and never lose money in the process.
In practice, this is impossible. The number one strength you
have is the ability to say no and pass on a deal.
I do it all the time and you should do it all the time. Rather than
trying to squeeze profts out of everything, wait for that great
opportunity and then commit enough of your capital so that it
has a meaningful impact.
When is a merger virtually risk-less profts for the taking?
Heres what to look for:
Regulatory Approval
First and foremost, I wont invest in an arbitrage play prior to Step
5. (See list of steps above.) Keep in mind: Risk-less investing in
a merger before Step 5 is like buying any old stock and hoping
that things turn out well. Though these companies have teams
of smart people preliminarily looking into the regulatory aspects
and pitfalls of the transaction, regulatory approval only comes
from regulators.
Why would regulators kill a deal that the companies thought
would go through?
I dont know. The types of companies that merge are usually big,
sprawling corporations. With subsidiaries operating in multiple
industries, there can be all sorts of problems for regulators to
pick over. The bottom line is prior to Step 5, there are a number
of risks, hurdles and obstacles that still need to be overcome.
Investing at this point is more speculation than risk-less.
Shareholder Approval or Pretty Much Guaranteed
Approval
You know what I dont want to see? A board that controls just
2% or 5% of the companys voting stock cutting deals that they
cant close on. When management controls a small fraction of
the voting control, they really need the shareholders or a few
large shareholders to rally behind them to get the transaction
done.
If a few major shareholders acquired stakes as a long-term
investment, they may not welcome a merger, acquisition, or
going private transaction particularly if they were acquiring
those stakes because they were ultimately planning on bringing
in fresh management and masterminding a turnaround or
control situation.
When management (and in the case of a merger or acquisition,
the controlling company) controls 35% or more of the voting
stock, there is rarely a question of shareholder approval. With
35% control of the deal, the company needs just 15% outside
shareholder approval hardly a lofty goal.
Of course, that assumes that the deal hangs on a majority vote,
and not a supermajority (66%, 70% or 80% approval).
Financing
51
When there are no fnancing contingencies in an acquisition or
going private transaction, Im happy as pie. (Im not so happy
when a company dilutes existing stockholders ownership by
issuing new shares to complete a merger or acquisition.)
When there are fnancing contingencies, you must decide how
that will affect the deal, if at all. If fnancing is contingent on (a)
the deal happening the way it was proposed, (b) there being
no material changes in the business, and (c) there being no
additional debt issuance, (along with other general loan terms
and conditions) there usually isnt a cause for concern.
If, however, fnancing is contingent on a number of factors
especially the market prices of either or both of the companies
you might run into problems. You have to ask yourself: Is this
a pretty straightforward deal or do the lenders have a zillion
ways to back out.
The Risk Vs. The Payoff Assessing the Odds
If all the ducks are in order, it is then time to analyze the
potential risk versus reward. The risk: If the deal falls apart, the
temporarily infated stock price will likely drop. The Dow has
been getting clobbered and yet Radiation Therapy Services
(RTSX) has been holding steady around $30. They are set to
go private (assuming shareholder approval and fnal signatures
and fnancing) at $32.50 a share.
Why? Liquidity has pretty much dried up and few people are
willing to buy or sell for much more (or less) than $30 a share
because of the going private transaction. If, however, the deal
falls through, youll see a lot of workout investors and other
shareholders getting out with the stock price dropping in the
process.
The RTSX deal is expected to close this quarter. A phone call to
the companys proxy solicitation agent reinforced that (though no
additional specifcs were given). April 21, 2008 is the fnal date,
after which either party can back out. Shareholder approval (of
which management controls more than 40%) is expected at
the special meeting of shareholders early next month. (If either
party terminates prior to that, there is a $25 million penalty
somewhat hefty considering the size of both companies).
The potential payoff is about 8.8% (from $29.87 to $32.50) on
an absolute basis. Assuming the deal goes through just before
the April 21, 2008 deadline, that comes out to an annualized
return of 28.8%, assuming you did this four times a year and
reinvested the full proceeds each time. (Tip: You only need a
few deals a year so dont jump into one today just because
you are just learning about workouts and think they are a good
idea.)
The downside? Assuming you could get out at $27 (a good-
til-cancelled stop order is handy here) your risk is about 10%.
Hmmm. 8.8% on the upside, 10% on the down. Doesnt sound
like a good, risk-less transaction, does it?
Play the Odds
As you look at RTSX, or any other workout situation, you have
to analyze the odds as well. Youll have a hard time fnding
post-Step 5 deals with 20% upside and 5% downside. It just
doesnt happen. So, what are the odds?
What are the odds that this deal will go through? I cant say
for certain, but I do believe that it is better than 50/50. This
is nearly a done deal and the only things that can upset the
applecart seem to be:
52
Virtually unanimous shareholder disapproval;
A substantial change in RTSXs business;
A major screw-up (and breach of duty) on the part of
management or the acquirer.
Merger Arbitrage, Step-By-Step:
To identify publicly announced acquisitions simply follow 1.
business publications (Wall Street Journal, Reuters, or set
up alerts on Google). Note that you should not make a trade
until the deal is almost done, i.e. Past Step 5 (see above).
Find out key information about the proposed acquisition: 1. 2.
Form of payment (cash, equity, mix), 2. Payoff to targets
shareholders (price offered or exchange ratio), 3. Is the
target resisting the acquisition, 4. Is there another company
that is likely to make a (higher) offer, 5. Likely horizon for
closing the acquisition, 6. Is there likelihood of regulatory
intervention?
Next, identify the difference between the offer price and the 3.
current target market price (also referred to as arbitrage
spread. For example, if the acquirer is offering $10.50 per
share and after the announcement targets price jumps to
$10.00, the arbitrage spread is $0.50 or 5%.
If you determine that the acquirer will successfully complete 4.
the acquisition at the proposed price, gauge whether the
payoff is commensurate with the risk. In the above example,
if the acquisition would be expected to close within 90 days,
simply buying targets stock and holding till completion will
result in a return of 5% in 90 days (or simple annualized
return of 20%).
If you determine that the arbitrage spread is commensurate 5.
with the risks, simply submit a buy order for the stock.
Generally, you would hold the stock until the completion of
the acquisition, at which point you will receive cash equal to
the offer price (and you would be able to avoid transaction
fee associated with actual sale of the stock). Alternatively,
you can call your broker and instruct them to tender your
shares (which most brokers will do for free).
In some instances, it may be prudent to close out your 6.
position before the completion of the acquisition. If, for
example, you purchase the targets stock at $10.00, the
offer price is $10.50, and after a month from your purchase,
the targets stock price is $10.47, it may be prudent to sell
and lock in a monthly return of 4.7% less transaction costs.
Monitor the news about the proposed acquisitions. While the 7.
vast majority of cash tender offers is successfully completed,
there is an occasional deal that falls through. If arbitrage
spread increases dramatically instead of converging on the
offer price, the market may be under the impression that
the deal may fail, the target will remain independent, and
in such an event targets stock price would likely drop even
further. Re-evaluate the risks carefully.
All the Work is Done For You:
Heres an excellent website I use to instantly bring up a list of
upcoming merger arbitrage opportunities. Make a note of the
mergers about to close and simply watch & wait until the stock
price foats down to a level at which an attractive proft is on
offer:
http://www.arbitrageview.com/riskarb.htm
53
If youd like to 100% automate everything Ive taught you so far.
And make all the profts, with NONE of the work. Then this may
be the most exciting chapter of the report yet.
In the preceding pages Ive laid out in great detail my strategy
for investing. Ive used this strategy to make many hundreds
of thousands of dollars and its no harder (or easier) now than
when I started. This loophole will never close because the faw
that creates this opportunity is literally built into the system.
Whats more to take advantage of this loophole you need
a mindset about investing that is completely contrary to the
mindset of Wall Street. You need to use a long-term viewpoint,
you need to be logical and sensible and you need to love the
unloved.
Some whove read this report will jump up and down at the
prospect of playing the stock market with this edge. To them
(and me) its the best sport in the world. Like gambling at Vegas
when you can see the dealers cards.
Ive gotta admit reading 100-pages of a Form 10 holds little
excitement for me. I dont know anyone who likes the number-
crunching aspect of it. But this work is like digging for buried
treasure. Every page is another spade of dirt. Its the prospect of
fnding the buried treasure that keeps me up reading at 3am.
But to others, this will all be arduous work. For the stay-at-home
mum or college student Copious amounts of reading and
analyzing is the last thing they want to do. I dont blame them.
So, what if instead - I told you I can give you a small red-
button?
And this red button will sit on your desk besides your computer.
But importantly, every time you push this button It will automate
the whole stock picking process. Itll search diligently for the
stocks about to move, itll do all the hard work and best of all its
hardly ever wrong!
Would you be interested?
Im sure you would. Who wouldnt?
Most people wont admit it. But effortless profts by just pushing
a button is everyones dream.
Well, I dont have a red-button to send you.
But I do have the next best thing. Because heres how you
can
Imagine this.
Imagine you forget about all the technical stuff Ive taught you
in this book. All the SEC flings, the accounting, the search
process Everything.
And you go about your normal life. Except every 2 or 3 months
I send you an email. This email includes a stock Ive personally
picked. The email includes a detailed summary of the reason
Ive picked it and exactly why I believe it could double or triple
in price.
Bonus Chapter #2 How
to Totally Automate ALL
of Tis!
54
You read the summary, do a little of your own research and
place the trade with your stock broker. Within just a month or so
I send you another email. It says something like:
Since I picked XYZ, inc the share price has doubled from $2 to
$4 per share. I believe XYZ is worth around $5.50 per share but
you should consider taking proft now ready for my next pick.
You can invest as little or as much as you like in these picks.
Maybe when starting you invest just $2,000 but within a month
you sell your shares for $4,000. On the next pick you could
invest the entire $4,000 with the prospect of turning it into
$8,000 or $10,000.
Of course, like any investment there are risks. But by buying
shares which are huge bargains, where we receive $1 in value
for every $0.30 or $0.40 we invest This risk is kept to an
absolute minimum.
On the other hand, the thing that keeps our risk to a minimum
The buying of little-known stocks trading at dirt cheap prices is
also what allows us to make 200%, 300% even 500% returns.
Economists wouldnt agree, their academic theories prove the
only way to make high-returns is to assume high levels of risk.
But for years Ive exploited exactly the opposite. Ive made ultra-
high returns buying some of the lowest-risk stocks around.
Lest you think this is Impossible:
Warren Buffett is the worlds richest man. But whats interesting
about Buffett is that he did not get rich by lucking out on one
company or product. Nearly every other billionaire youll fnd,
even the equally smart Bill Gates (second richest man) got rich
because Microsoft was a huge success.
Carlos Slim got rich bringing telecoms to Mexico, Lakshmi
Mittal got rich building the worlds biggest steel maker, Ingvar
Kamprad got rich with the genius idea of fat-pack furniture
(IKEA).
The list goes on.
Pretty much every billionaire got rich off of one genius idea.
Sure there were loads of great decisions along the way, but in
most cases the genius idea was destined for success.
On the other hand, Warren Buffetts huge wealth was
accumulated through thousands of completely independent
stock trades. The only common thread being the strategy he
devised and followed. A strategy very similar to the one Ive
outlined above.
His wealth didnt suddenly explode when he hit the big time.
He followed a plan and compounded his wealth at 28% a year
starting with just the $5,000 he made as a paperboy. Each year
the $5,000 grew & compounded to the point where he is now
worth roughly $50 Billion.
You cannot replicate the success of Bill Gates. Microsoft was
the right product at the right time. A genius move arguably as
big as the invention of the rail system or telephone.
Even if you personally know a self-made millionaire. In most
cases no matter what he or she tells you, you cannot replicate
their success. There is no secret. Sure you can copy the work
ethic or management style. But Im talking about carbon copying
a blueprint to success, a surefre way of getting rich.
To my knowledge there is only one. And this is it.
But Dont Get Excited Just Yet
55
Look, membership to my exclusive stock picks club doesnt
come cheap. In fact it costs $4,997 per year. And I wont
apologize for charging such a high amount.
For the past 3 years Ive sent my stock picks to a small number
of subscribers. I send just 4 or 5 stock picks per year and the
average gain from each stock pick is 119%!
Sure I could send stock picks every 2 weeks or month But I
dont. This annoys some of my members but its important I do
this.
You see I only send stock picks when I believe theyre a sure
thing. If you receive a stock pick from me you know Ive spent
at least the past month researching the company. Literally
hundreds of hours goes into fnding and researching each pick
I make.
I do this work all on my own. Wall Street fund managers boast
about having a stable of analysts at their disposal. To me this is
a disadvantage. I do all the work myself; because of this I have
supreme confdence in my selections. By the time I make a
pick, I probably know more about the company & industry than
the management!
Anyway Enough Bragging - You get the Point
Each stock pick is a very valuable piece of information. Its the
directions to a place you can swap every $1 for $2. And I just
cannot sell 4 or 5 of these nuggets of information for any less
than $4,997.
Put it this way, most hedge fund managers charge their clients
20% of profts + a 2% fee on funds under management. To my
subscribers this $4,997 is just a 5% or 10% charge against the
profts I make them.
But there is some hope for you.
Ive recently decided to expand my subscriber base. And the
$4,997 fee has given me a problem.
Sure my current subscribers think this price is a steal, but to
those who havent yet profted from my picks its a big risk. For
those who havent witnessed the success with their own eyes,
spending $4,997 on stock picks is a leap of faith at best.
Most of my current subscribers are people I know in real life or
referrals from other happy subscribers.
I thought long and hard about this problem. Heres what I came
up with:
Join my small club of stock pick subscribers for just $97. Youll
be a FULL subscriber for 12-months. Youll receive everything
my full $4,997/year subscribers receive.
Every 2 or 3 months Ill email you a stock pick I believe will
double or triple in price. Over your 1 year trial youll have the
opportunity to make tens of thousands of dollars in proft.
My hope is that after 12 months of my stock picks. After making
tens of thousands in proft from my picks. Youll have no problem
paying $4,997 to become a full member Especially since youll
probably be able to cover this from your frst-year profts!
In summary youll receive:
12-Months of My Stock Picks Just $97 (One-Time Fee)!
Fair enough?
56
To get started, just click the link below and go straight to the order page:
http://hackthestockmarket.com/onetimeoffer.php

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