It seems so many are consumed by the Elon / Twitter merger drama. Specifically not only with their commentary but with their wallets.
Merger arbitrage is defined by Investopedia as:
Merger arbitrage, often considered a hedge fund strategy, involves simultaneously purchasing and selling the respective stock of two merging companies to create “riskless” profits. Because there is the uncertainty of the deal being completed, the stock price of the target company typically sells at a price below the acquisition price. A merger arbitrageur will review the probability of a merger not closing on time or at all and will then purchase the stock before the acquisition, expecting to make a profit when the merger or acquisition completes.
Investopedia
It’s a professional niche of the finance industry with many fund managers focusing exclusively on this practice, doing it dozens of times per year, and often accumulating a satisfactory return.
Hoards of people are piling into Twitter stock in the 30s as Elon’s signed merger agreement is for ~$54 / share. The premise is generally that the buyer believes contract law will prevail and Elon will be forced to buy the company.
I think this is because investors, generally speaking, retail investors have few constraints within the world of publicly traded equities. There are simply *too many* opportunities. And if one is not honest with one’s self on what they believe they understand, have a process around, and have schmuck insurance in case they are wrong about everything – everything looks like a nail.
If Twitter has a positive result for the merger arb tourists, in inevitably will ascribe more of the result to skill in security selection than blind luck. And that leads to more emboldened bets in the future, with no unbiased self reflection on whether the merger arb investing style fits their intellectual and psychological makeup.
Style drift, in my opinion, is fine. One just has to be super methodical on establishing a process and evaluation milestones.
Often easier is to just stay in one’s strike zone and wait for the right pitches.