Lessons from butchering two microcap takeouts

Let's be better in 2026

Dear Reader,

Everyone makes mistakes, and that’s cool. If you can learn from them, that’s even better. I’m not one to trivialize learning; changing is hard, let’s not downplay that.

I’m a slow learner myself, but occasionally I get thwacked in the head with some low hanging fruit. That moment of pain is your opportunity to cement the feeling and actually learn something — maybe, if you seize the moment.

Learning opportunities of recent years prompted me to lean into a successful niche and limit losses

For example, when SRC LN was trading for 10x forward earnings, I understood that to be an opportunity because I knew the pain of passing on USLM US from a couple years prior. And I’m grateful for that! I even devoted a section of my limestone post to this “learning opportunity”:

Another one of my rare learning opportunities was getting absolutely obliterated buying a natty uplisting in 2022. It went straight down, all the way to bankruptcy. I had bailed long before bankruptcy, but it was a big, sharp loss. I saw how quickly (re-capitalized) oil&gas shitco fundamentals can deteriorate, especially in the presence of debt. That was quite painful and the experience allowed me to limit losses and save time on PROP US earlier this year, which was also a kind of painful experience, but the name of the game is making incremental adjustments towards hopefully getting a little better every year.

I’ve been learning extra slow on microcap merger arb type of situations, but maybe this is my year

A few years ago, there was a very small nutrition / supplements company that had a binding takeout offer. I was seeing approximately 35% upside by deal closing time, which was contingent on financing. I built up a significant position, although I was a little wary at the foreign buyer. An 8-k was issued that long story short made the situation more suss and added some details about potential large legal reserves not being paid out for up to a year after sale. I bailed out for a ~10% loss. The deal closed a few months later, and of course I felt pretty dumb.

First of all, I’ll give myself a little slack here: I can always respect someone backing down from a risk they feel has gotten over their head. Especially pre-AI, and this was an extremely small company, around $10mm market cap. What I would do differently in the future is try to get in contact with one of the activist funds that was involved in pushing for a sale in the first place.

Overall I could have played the situation better, but I don’t consider that situation to be a big mistake. After all, there probably was some real risk lurking there, even if it was mispriced. And it was my first time.

I did make a pretty big mistake recently, though, with FONR US:

I had stalked Fonar for years and had become pretty familiar with the whole value trap dynamic. Management made a low-ball takeout offer earlier this year that was going through a fairness review with the board. I saw Fonar trading at nearly a 20% discount to the deal price several weeks ago and bought a significant amount on the thesis that the most likely outcome would be a slightly increased takeout offer (to protect the illusion of a fair deal) to get across the finish line.

I then sold a week or two later for just a few percentage gain, distracted by other trades. Sadly for me, my thesis came true and Fonar is now up 27% in one day, and I made peanuts.

Why this is a big mistake and not a medium mistake

Folks, I am extremely used to making all sorts of mistakes that lead to missing out on huge gains — much bigger than 27% — so why exactly is this such a big mistake?

Because this situation clearly had much less “sketchy” risk than the previous example. The setup was extremely asymmetric, and I need these type of uncorrelated opportunities to manage my risk and smooth out long-term performance. It’s about what situations like this do for your portfolio as a whole.

My simple takeaways

My takeaways here are really simple: common sense seems to prevail in these situations.

• Is there a huge spread? There’s probably a real risk lurking, but it gets more ambiguous how much spread is justified at smaller size. Don’t buy every sketchy 35% spread, but well, use your judgment. Size appropriately.

• Think about why people might be selling — if there was a broader market dislocation or it’s tax loss season or there’s a key shareholder liquidating for uneconomic reasons — boom, that alone can be sufficient to explain some pretty solid opportunities; otherwise, it might just be more sellers than buyers — ultimately stonks is just people clicking buttons and yes sometimes the price does break a bit temporarily.

• This certainly isn’t an ironclad rule, but I think generally it makes sense to add confidence in situations with known / successful activist investors (as in my first example), if nothing else they have a concentrated economic / legal interest in getting across the finish line

Ironically, my experience has taught me not to second guess myself too much. I had some remnants of mystical belief in market efficiency. There’s nothing mystical about this merger arb stuff in very small names, it’s all the same, just people clicking buttons. Be skeptical and apply common sense like with anything else, but there are certainly inefficiencies to be found and they can be wonderful for your portfolio — if you execute properly!