How to Follow This Activist Investor into Your Next Profit Opportunity

When I go shopping, I always look for bargains. If steak is on sale, I buy a lot of steaks. If pork chops are the sale item, we have pork chops at my house.

If I see an opportunity to buy the clothing and household items I prefer at advantageous prices, I pounce.

Activist Investors

That carries over to my investments as well.

I'm a huge fan of buying investments for less than they are worth and selling them when the market recognizes their true worth.

I also watch for activist investors who feel that way, because I can follow them straight into profit opportunities like the one I'm about to show you...

The Engineer Turned Activist Investor

Philip Goldstein was born in Brooklyn in 1945.

He became an engineer as a result of a surge in patriotic emotions following the launch of Sputnik.

Goldstein attended The University of Southern California and returned to the City College of New York.

Although he never made it to the space program, he did work as an engineer for the City of New York for 25 years.

Because of his advanced math skills, he was a very good blackjack player and even considered a career as a professional gambler.

He eventually stumbled across a book about using math to beat the markets by a fellow engineer named Thomas Noddings.

Goldstein transitioned into an investor after learning how to use the methods in the book.

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He takes positions in closed-end funds trading below net asset value, and he will take an activist approach when he feels it is needed to eliminate or reduce that discount.

Without going into a super long discussion of closed-end funds, just know that they are mutual funds that trade on an exchange.

When you want to buy or sell, you do so at the stock exchange rather than through the fund itself.

Since they are exposed to the psychological soup of stock traders, these funds can sell for more or less than the actual value of the actual holdings of the fund.

Activist investors like Mr. Goldstein simply buy shares at a discount value and look to prod management into taking actions. Those actions include share buybacks or liquidating holdings and returning the cash to shareholders.

Buying into these funds early is like going to the mall on Black Friday. You're getting the best deal you possibly can, except you're going to bank the profits once the activists push the fund prices up to their true values.

And right now, this activist has another fund squarely on his radar...

Follow Philip Goldstein into This Profit Opportunity

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Goldstein started buying shares of the Aberdeen Japan Equity Fund Inc. (NYSE: JEQ) back in the first quarter of 2017, and he has been steadily buying shares since.

He now owns 4.32% of the funds, and if he reaches 5% in the next few months, he will have to file an ownership statement with the SEC.

If he files a 13D announcing an activist stake instead of a passive investment, the shares should see a short-term pop in price.

And it's easy to see what drew Mr. Goldstein's attention to JEQ...

Japan Equity shares trade for 11.8% less than the actual value of the stocks they hold in the portfolio.

And they aren't just little stocks...

There are large Japanese blue chips that will benefit from the expansionist policies favored by Prime Minister Shinzo Abe and The Bank of Japan (BoJ).

Its top holdings include Honda, Toyota, Japan Tobacco, and Yahoo Japan. The fund currently yields 5.4%, so investors like Mr. Goldstein will enjoy a steady stream of income while waiting for the stock to appreciate and the discount to narrow.

In his recent macro update, Henry McVey, of private equity leader KKR Co., was very bullish on Japan.

"Unlike in the U.S. (where we view a tight labor market as potentially problematic), we view Japan, a country desperate for reflationary trends, as a direct beneficiary of tight labor markets and faster growth. Indeed, if the global backdrop is beginning to shift from one of disinflation to one of reflation, then Japan more so than almost any other country we invest in, should benefit mightily for years."

In other words, even if Goldstein does not apply pressure to reduce the discount - a scenario I consider unlikely - there is a good chance we make money as the stocks in the portfolio appreciate along with the Japanese market.

And with Aberdeen Japan Equity, there are three ways to win...

A rising market, a generous dividend, and a narrowing discount can all provide substantial returns.

The generous dividend ($0.06) provides an additional bonus return in today's yield-starved world.

Following when Mr. Goldstein is buying heavily discounted closed-end funds has been, and should continue to be, a very profitable low-risk investment strategy.

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About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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