Event Driven Investing: A Wonderful Company with a Short Term Problem

Event driven investing is Warren Buffett style investing. We look for a strong company in our circle of competence that we are capable of understanding and has meaning for us. We make sure we like the leadership of the company. Then we value the company to determine what price we feel comfortable buying shares of the company.

Many of the largest hedge funds in the world use the event driven investment approach. That includes Warren Buffet’s Berkshire Hathaway, Bill Ackman’s Pershing Square, and Prem Watsa’s Fairfax Financial. In this video clip, Warren Buffett talks about valuing a business then buying more of the business when the price drops. His comments on event driven investing start at the 4:00 mark.

We find a wonderful company with a strong leader and we determine the value of it. Then we wait for something to happen that causes the trading price of shares of that company to drop. That ‘something’ is known as the ‘Event’. When the share price of our company drops near our buy price, we research the event causing the drop. We need to make sure we understand the event that is causing the share price to drop.  

Understand the Event

The event could be a large scale, macro event that crashes the entire stock market, like Covid19. Or it could an industry-specific event, like the recent banking turmoil that’s seen several regional banks fail. Or it could be a company specific event, like Budweiser’s recent marketing choices. 

Event Driven Investing
Understand if the company can overcome the event to continue along its previous growth trajectory

With event driven investing it is crucial that we understand if the event will destroy the company or if the event is only a temporary set-back. This is why it’s imperative that are thorough in our research of the company and our understanding of the event. We need to will know if our company will come out on the other side of the event bigger, stronger and more profitable than it was going into the event.  

Once we understand the event and we’re comfortable entering a position in our company at the price we want to own it, we use derivatives to tranche into our position at the lower share price.

As the share price eventually rises back to the trading pattern from prior to the event, we capture the gain. With event driven investing we are not waiting for the company to grow or acquire another company to trade at an all-time high, which can take months or years for other investors to recognize. Instead, we are just waiting for the share price trading range of the company to ‘get back to normal’. This is why event driven investing can earn a higher return with lower risk than many other investment approaches.