Benjamin Graham's Special Situations or "Workouts"

Special Situations are advanced strategies that Benjamin Graham — Warren Buffett's mentor — recommended for professional investors.


For professional investors, Graham described the following types of Special Situations or Workouts.

“There is also a fairly wide group of “special situations,” which over many years could be counted on to bring a nice annual return of 20% or better, with a minimum of overall risk to those who knew their way around in this field. They include intersecurity arbitrages, payouts or workouts in liquidations, protected hedges of certain kinds. The most typical case is a projected merger or acquisition which offers a substantially higher value for certain shares than their price on the date of the announcement.”
Benjamin Graham, Chapter 1: Investment versus Speculation, The Intelligent Investor

Buffett and DCF

Special Situations require more than the average level of ability and experience. Graham's more famous students — such as Warren Buffett — would therefore be more apt to use Special Situations for their own operations, which has possibly given rise to the myth that Buffett no longer follows Graham, or that Buffett now uses DCF.

Special situations are discussed in more detail as Strategy #5 of How To Build A Complete Benjamin Graham Portfolio.

Buffett: Fisher, Munger and Graham

At the 1997 Berkshire Hathaway Annual Shareholders Meeting, Buffett describes how he graduated from Graham's basic framework into Special Situations and how Phil Fisher and Charlie Munger contributed to the change.

Peter Lynch

In the following video, Lynch explains why the professionals no longer have the structural edge they once did, and the advantage is now more psychological.

"The data now is so good. I remember waiting for the mail to come to our library to check Nike's annual report... So theoretically the individual's edge has improved in the last 20, 30 years versus the professional. The problem is people have so many biases."