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when your analysis, your system and your strategy say that you have a buy or sell to execute. If the market doesn’t have a clear direction, then wait on the sidelines until it does. Keep your mind on the market, but keep your money out of it.

      8. Love your losers like you love your winners.

      Losing trades will be your best teachers. When you have a losing trade, it’s because of some flaw in your analysis or your judgment. Or perhaps the market simply didn’t do what you thought it would. When you have a losing trade, something is out of sync with the market. Examine what went wrong - objectively - then adjust your thinking, if necessary, and enter the trade again.

      9. After three losing trades in a row, take a break.

      This is not the time to take on more risk, but rather to become extremely disciplined. Sit on the sidelines for a while. Watch the market. Clear your head. Re-evaluate your strategy, and then put on another trade. Losses can shake your confidence and tempt you to become emotional (fear/greed) But if you take a break, you can gather your wits and regain your composure more quickly than if you become very emotional and angry at yourself and the market.

      10. The unbreakable rule.

      You can break a rule and get away with it once in a while. But one day, the rules will break you. If you continually violate these ‘commandments’ of trading, you will eventually pay for it with your profits. That’s the unbreakable rule. If you have trouble with any of them, come back and read this one. Then read it again.

      ‘By their nature, turnaround stocks are unpopular. That’s why they have so much profit potential. If you wait until they are popular again, you will miss most of the gains. Back in 1993 when IBM dropped down to about 10 (adjusted for splits) most analysts called it a dinosaur. When it got back up to 100 a few years later, everyone loved it again.’

      George Putnam III

      David Braun

      David Braun founded and is President of Virtual Strategies Inc., a consultancy which advises clients on proactive acquisition or divestiture programs.

      The firm has acted for small and family-owned businesses, as well as Fortune 500 and multi-national companies, in a wide range of manufacturing and service industries.

      Over the past 10 years, Mr Braun has lectured to over 10,000 top-level business executives, through the American Management Association and various industry organizations.

      How to make gains from M&A activity

      1. Invest in experienced buyers.

      If you’re investing in a company that is entering acquisition mode, make sure the people running it are experienced in M&A. A company that has executed a few successful deals recently is a better bet than one which has just started to think about making acquisitions.

      2. Back an acquiror with a comprehensive strategy.

      To maximize the chances of making successful acquisitions, an acquirer needs to have a compelling external growth strategy, with associated milestones and timeline. Avoid investing in ‘one-trick ponies’ – those companies looking for the one silver bullet acquisition that will propel them to where they want to be.

      3. The acquisition of a great company is only as good as its integration plan.

      The acquiring company needs to have a solid integration plan that solicits involvement from key management in every major functional area. Look for evidence of a ‘100-Day Plan’ which illustrates in detail exactly how the two companies will be fully integrated 100 days after ‘go live’ day (the close).

      4. Ignore the financials.

      Well, not entirely. But avoid investing in a company that is making acquisition decisions based on its CFO saying “we can get a great price on this company.” Remember, a balance sheet doesn’t generate profits - people do. Accretion/dilution should not be the number one acquisition criterion. Simply stated, you can overpay for a good company and recover your earnings with time, but you can underpay for the wrong company and never recover.

      5. The customer is always right.

      When deciding whether consolidation makes sense for a company whose stock you own, consider its customers. The mere fact that a sector is fragmented does not make it ready for consolidation, and conversely, there are plenty of fairly concentrated industries that are still managing to consolidate with impressive multiples (e.g. banking). A good rule of thumb is to look at the industry’s customer base and determine if there is demand for consolidation. Good industries to watch are those that have major, multinational customers that will demand a wider-spreading presence.

      6. When investing in potential takeover targets, do your homework.

      Don’t rely on hunches, gut instinct, or market rumors. Identify companies that are likely sellers due to below average stock performance (and restless shareholders), older senior management, ownership base, etc. The market may unfairly undervalue some companies by painting them with the same brush as an entire underperforming industry group.

      7. Don’t be duped by a target’s stock that is ‘on sale’.

      Avoid arbitrarily investing in a stock that seems to be underpriced in the hope that it will later be sold for a premium. Many stocks, while appearing to be bargains, are simply ‘broken’ or long-term underperforming stocks. Just because the stock was once trading at a much higher level it is by no means certain that the stock will ever return to its previous high.

      8. An acquisition premium may already be built in to a stock price.

      Do not necessarily vote against the sale of control in a stock you own because the offer price is not at a significant premium to the current market price. The market may already have incorporated an acquisition premium into the stock, therefore minimizing the potential for an additional premium offered by a buyer.

      9. A receding economy creates novel M&A opportunities.

      Many people assume that a downturn in the economy will drag M&A volume down with it. In fact, shifting market dynamics of any kind will change the complexion of deals, but not necessarily the volume. For instance, a company that has been on a buying spree to diversify its business may decide, in a tightening market, to return to its fundamental competencies and sell off a non-core business line, thus creating an acquisition opportunity for a buyer.

      10. Question the Board of Directors before voting to accept an offer.

      When confronted with an attractive offer, the Board of a target company may need to be reminded of its fiduciary responsibility to shop the deal around for the highest sale price possible. Many buyers will finagle their way into an exclusive offer, which may appear attractive enough to woo a Board that is eager to complete the sale.

      ‘Stock prices are anchored to ‘fundamentals’ but the anchor is easily pulled up and then dropped in another place. Given that expected growth rates and the price the market is willing to pay for growth can change rapidly on the basis of market psychology, the concept of a firm intrinsic value for shares must be an elusive will-o-the-wisp.’

      Burton Malkiel

      Ian Burns

      Ian Burns is employed in Chemical sales at Salomon Smith Barney.

      His team has been ranked in the top three of all the major surveys (Reuters, II and Extel)

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