Herb Greenberg wrote an excellent column discussing one of the potential pitfalls of the current buyout boom: Rumors are flying around like crazy, and a lot of them aren't true. Earlier this year, buyout rumors surrounded Krispy Kreme(NYSE:KKD), and they have so far proven to be unsubstantiated. Investors who bought into the rumors have lost a good chunk of their "investment" (Speculation is the word for buying on hopes of a buyout).
Here's my advice for how to avoid the pitfalls of buyout rumors, most of which lead to nothing: Ignore them. Focus on buying companies trading at compelling valuations and buyouts will come along often enough. At more than 1.5 times sales, it should have been obvious that the Krispy Kreme rumors were going nowhere: Dunkin' Donuts had recently been taken private at about 0.5 times sales.
The thing to remember is this: If you're an insider, then it's illegal to trade on information you have about an upcoming buyout. If you're not an insider, then you're just guessing along with everyone else. Speculating on buyouts is a loser's game.
