Eating Better and Drinking Less Wine? Nah

 | Dec 30, 2011 | 1:00 PM EST  | Comments
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Stock quotes in this article:

ire

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rbs

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mtu

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mfg

I am gearing up for a big weekend around Chez Melvin as this is one of the biggest sports weekends of the year, and I plan to celebrate right from my couch. Saturday brings the blood-grudge match of Kentucky vs. Louisville; on Sunday, the new year rings in a full lineup of the NFL, and many college games will follow over the next few days. Along with this sports extravaganza, I suppose I will have to work up a few New Year's resolutions for the year ahead.

My resolutions will not be anything as boring as eating better or drinking less wine, exercising more or giving up my carefully collected bad habits. I tend to break those by lunch on New Year's day anyway. However, I do have a few market- and business-related resolutions that I intend to keep in 2012.

First and foremost, I will continue to dig in and around corners of the market that no one else wants to explore, since much of my success over the years has been a result of taking this approach. I'm sure I missed several opportunities for big profits this year in preferred stocks, liquidation arbitrage, busted convertibles and other weird situations. Companies that emerge from bankruptcy often offer superior potential and can often offer trading opportunities to be exploited. Busted merger stocks are another valuable source of opportunities that I need to explore more in 2012.

I have paid for a few cars and countless bar bills with micro-cap merger arbitrage, which I got away from this year. Although an enormous amount of money chases merger arb, almost no one is looking at small deals, and this will be especially true of small bank mergers. It is not as easy to hedge these little deals. It is tricky to borrow stock and obtain leverage on micro-cap securities, which often discourages the pros with larger pools of money. One caveat: Read Guy P. Wyser Pratte's and Keith Moore's books, both entitled Risk Arbitrage, before attempting to trade in this space. Like hitting a curve ball, it is not as easy as it looks.

I also resolve to practice more patience. The most valuable lesson of the past three years has been to borrow liberally from Walter Schloss's writings and interviews over the years. Scaling into long-term investments usually makes more sense than piling into a full position right away. I bought many stocks this year at a slight discount to book value that later traded as low as half of tangible book value. Had I bought a full position out of the gate, I would have limited my profit opportunities. Usually, some sort of bad news drives stocks below book value, and bad news usually gets worse before it gets better.

Another resolution is to stay open-minded when it comes to markets. My success in the market accelerated in a meaningful manner when I started hanging around a crowd of thoroughly disreputable option and stat arb traders in Chicago back in 2000. Adopting their techniques and adding them to the basics of deep value investing has proved to be very rewarding. The same can be said for my friendship and frequent discussions with short-term traders and technicians, such as Bob "The Beard" Bryne and Tim "It takes 37 different strikes before it's a real trade" Collins. No matter how you trade or invest, being rigidly dogmatic not only makes you a poor conversationalist, it costs you money. One of the very best features of Real Money is that the range of approaches and techniques allows you to learn from those who approach the markets differently than you usually do.

Further, I resolve to focus my core, long-term efforts on the cheapest of the cheap. The opportunities in banks and real estate over the next decade are extraordinary. So is the current price level of certain European banks, chiefly Bank of Ireland (IRE) and Royal Bank of Scotland (RBS). The same holds true for select Japanese financials, such as Mitsubishi UFJ Financial (MTU) and Mizuho Financial (MFG). These stocks will either go to zero or will become tenbaggers over the next 10 years. Select hotels and shopping center REITs have the same risk-reward profile as do many community banks. I like the long-term odds for owning a portfolio of these most downtrodden, incredibly cheap stocks.

My final resolution is to answer every email sent to me at TMelvin@Gmail.com, and I look forward to hearing form many readers and friends during 2012.

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