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Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown

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Beating the Market

This is not the kind of thing most people have in mind when they think of “beating” the market. The idea is staggeringly simple and obvious. Execution requires meticulous care, not swaggering courage or penetrating brilliance. You have to read all the legal documents very carefully to make sure there is no circumstance in which the Class A shares are worth more than the Class B shares. For example, the company may have adopted a poison pill that requires Class A shares, but not Class B shares, to be paid a $100 per share special dividend if anyone acquires more than 15 percent of the company without the board's approval. Not all dual-class share situations involve differential voting rights; there are many varieties of deals, each with its own idiosyncratic features and pitfalls. You have to negotiate good margin terms, as well as a good interest rate on the margin balance. You have to be very careful about expenses, both brokerage fees and the bid-ask spread on security prices. Your reward is not overnight riches, but a slightly better rate of interest and an occasional small windfall.

There is a risk to this strategy, but from the point of view of a blackjack card counter, it comes from weak and foolish people, not economics. Suppose the spread between Class A and Class B stocks widens. Say Class A goes up to $53 while Class B stays at $49. You have lost $200,000 on your short and made no profit on your long. Your margin balance falls to $800,000. Your broker ...

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