Mitigating Take-Under Risk When Stocks Drop 50% or More

During their recent episode, Taylor, Carlisle, and Whit Huguley discussed Mitigating Take-Under Risk When Stocks Drop 50% or More. Here’s an excerpt from the episode:

Jake: Whit, have you ever gotten in a situation where, I know I personally have and it’s really frustrating is, let’s say you buy something and it gets cheaper on you and the cheaper it gets, you almost feel like you have to keep doubling down in order to mitigate some of your take under risk. You need to keep lowering your cost basis so that when it gets taken out back at below your original price, everyone says yes because the newest people who came in think that’s a good price for them, but your price was way above that. How do you mitigate for that?

Whit: Yeah, I was just in that exact situation. When I have my Excel spreadsheet of the companies that I own, I do it by market cap, but also by capital invested to see what percent capital invested I’ve had in this company. So, when I’m averaging down, it says I only own– it’s only 3% of my fund, but I’ve invested 8% capital at cost into the fund. So, I’m thinking about that a lot. I think that’s the hardest thing, is when it goes down that much, there’s the risk of take under. I mean, I think your brain immediately thinks, “What am I missing?” I think that’s where the due diligence side has really helped me.

But I had a company recently, Galaxy Gaming, that I would say got taken under. I think eventually they could have sold for $8 to $10 a share and they sold to Evolution Gaming for $3.20. And as it went down, I bought shares. So, we about broke even. But looking back, maybe I should have bought more. It’s extremely hard because I think it went down 50%, 70% from where I originally bought it. So, I was able to at least average down enough to breakeven. But there were some investors– Because when it got bought out for $3.20, it was trading shortly before that like under $2, I think well under $2. There are some investors who made 100% returns. Yeah, that is I think one of the hardest parts of investing is when it’s down that much. And I think that’s what’s happening at GreenFirst right now.

Jake: It’s really difficult too because the lower it goes, probably the greater the chances of a take under start because it’s just like cheaper and someone’s going to notice and then there’s more chance of an activation happening that then takes you under officially.

Whit: Yeah, it’s like the one-

Jake: You have to commit good money after bad, in a way.

Whit: Yeah, it’s like the one time that I wouldn’t mind the poison pill being implemented is when the share price gets that low to prevent that from happening. But yeah, it’s so hard because– Yeah, I totally agree. I think that’s one of the hardest situations, and I’ve been caught in it two separate times.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts