The target is a good point. I knew them as "blank check" corporations, but after the target is identified that is less true.
Thanks for the article and the thoughts!
There is still due diligence that can be done as part of the blank check portion. I usually look at the leadership team of the SPAC, if they've taken other companies public before via SPAC or otherwise how did that turn out, what industry are they targeting, trust size, etc.
SPAC shares have a NAV of $10 (in most cases, Ackman's has a NAV of $20) until after the merger is completed, so while they are blank check corporations if you can invest around NAV your downside is actually somewhat capped by the fact that the shares themselves have $10 sitting in a trust. In my mind that makes them not very risky. I usually identify ones with good leadership teams that just IPOd and get in near NAV, $11 or less, and then just let it sit there. This theoretically caps my loss at 10%. Now it is possible that after the merger they can go below NAV or if the market crashed people may be willing to sell their shares below NAV for liquidity, but until the merger the trust with $10/share is there.
The problem with the "great" leadership teams is it becomes very hard to get in near NAV with them. Chamath's are all 50% above NAV even pre-target or rumor. Ackman's is currently about 60% above NAV on rumors of Stripe (which I think are very much just rumors). I sold a couple $15 CSPs for IPOF for $1/share. So if I happen to get assigned my cost basis will only be 40% above NAV instead of the ~55% it's currently trading at, but it's also looking like I won't get assigned.
IMO when you chase SPACs you're going to lose. But if you get in very close to the IPO date and just let it sit there doing nothing for 3-4 months 10-20% gains are extremely reasonable. It's also important to know the SPAC trading life cycle. When an agreement is reached in most instances share prices will jump 10-50%, depending on the target. Typically people will get out there as that's the peak until the actual merger date is announced. It'll bleed back down between DA and Merger announcement date. Then they'll slowly start to run up as the merger date/ticker change approaches. In most instances you don't want to hold through merger as that's when a lot of Pipe investors can dump their shares on the open market and some brokers charge money for the ticker change. So if you want to own it long term best bet is to sell a few days before merger, then wait for the dust to settle over the first couple of weeks and then get back in at that point.
Honestly I thought it was sketchy at first when a friend told me about it. But you need to think about this differently. It's not investing, it's more akin to house flipping. You just have to be the one patient enough to park your cash in something that is literally nothing for a few months in a market where everyone is trying to make a quick buck. Buying near NAV SPACs is like watching paint dry :)