Once a spin-off stock is on my watchlist, I treat it as any other candidate for a trade.

I have said before that I follow Gerald Loeb’s dictum requiring a reason and a move before entering a trade. This mix of fundamentals and technicals makes sense to me and here’s how I do it.

For the spin-off to become the reason several things have to happen

• I read all the press releases and stories based on them that I can find.
• I read the SEC documents as they come out.
• I try to take the potential new entities separately and see how they compare to their competition.
• I try to understand what’s happening in a more general sense.

For me to go ahead, the whole thing has to make sense to me and to look potentially attractive if all goes as planned. I emphasize making sense to me because I am going to have to be the one to make the decision to enter the trade and, more importantly, I am going to have to be the one who decides when to get out.

When I set up my individual trade sheet, right at the top is a section for the reasons for this trade. That way if (when?) I find myself taking some heat on the position I can ask myself

• why am I in this trade?
• how is it doing relative to those criteria?
• are the basis pieces that could make this trade successful still in place?
• has something changed materially that I should be factoring in?

What’s the old saying? When you’re up to your ass in alligators, it’s hard to remember you came to drain the swamp?

Well . . . . when you open up your quote screen and you can’t believe what you’re seeing is no time to forget what you’re there to do. On the other hand, if you can remember what you’re there to do at that point, every single time, you’re a better trader/investor than I.

That’s why I write it down. In block letters. Right up at the top of the trade sheet. And I do read it every time I am having to decide to exit, to pull up a stop, to buy protective puts, or whatever. These are not times to let your primitive fight/flight/faint response run the show.

Which brings me to my last point here. Just because I don’t understand a reason, doesn’t make it not a reason. Take a look at my post about the Liberty Media spinoff and PlanMaestro’s comment.  I went back and looked at that one and I realized that

• he’s probably right about the hidden value in there
• Joel Greenblatt did give a long example of making a ton of money in a very similar situation
• I couldn’t really keep up with Greenblatt’s description of what Mr. Malone was doing (though I recently stepped through it again) and I just can’t get enough of a handle on what PlanMaestro has pointed out to be sure of myself when I have to pull the trigger.
• unless I can get up to speed on this kind of analysis or I can get the PlanMaestros of the world to keep tugging on my sleeve and whispering in my ear that I missed seeing where they hid the money . . . again . . .  I had better steer clear of this kind of reason.

So,  what do I do to decide if there is a good enough reason for me and what constitutes good enough move for me?   More on that in the future.