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FOR THE FIRST TIME EVER, DISCOVER HOW WARREN BUFFETT HAS MADE UNHEARD-OF PROFITS IN THE WORLD OF ARBITRAGE AND SPECIAL INVESTMENTS, AND HOW TO BE A PLAYER IN THESE VENTURES.
Investors around the world recently learned that from 1980 through 2003 Warren Buffett’s arbitrage operations produced an astronomical average annualized rate of return of 81.28%. Even more amazing, this incredible rate of return was produced with very low rates of risk.
Long considered one of the most powerful and profitable of Buffett’s investment operations, but the least understood, these special types of investments have been the edge that made Warren Buffett so phenomenally successful. Warren Buffett and the Art of Stock Arbitrage is the first book to examine Buffett’s special brand of arbitrage investing.
Buffettologists Mary Buffett and David Clark explore the previously secret domain of Warren Buffett’s stock arbitrage investments. They explain how Buffett finds deals, evaluates them, picks the winners from the losers, and when he is willing to use leverage to help boost his performance in these investments to make amazing profits. Basic mathematical equations are included to help readers determine the projected rate of return, evaluate risk, and determine the probability of the deal being a success.
Buffett and Clark provide detailed explanations and examples of Warren Buffett’s methods for arbitrage, and for investing in tender offers, liquidations, spin-offs, and reorganizations. They take readers step by step from the initial public announcement to tendering shares, explaining how Buffett evaluates risk and maximizes his profit at every step.
�Warren Buffett and the Art of Stock Arbitrage is a valuable companion to the other books in Buffett and Clark’s successful series—Buffettology, The Buffettology Workbook, The New Buffettology, The Tao of Warren Buffett, Warren Buffett and the Interpretation of Financial Statements, and Warren Buffett’s Management Secrets.
- Sales Rank: #193703 in Books
- Published on: 2010-11-09
- Released on: 2010-11-09
- Format: Deckle Edge
- Original language: English
- Number of items: 1
- Dimensions: 7.50" h x .70" w x 5.63" l, .63 pounds
- Binding: Hardcover
- 176 pages
Review
“International bestselling authors Mary Buffett and David Clark explain how arbitrage turned Warren Buffett from a great investor into a worldwide phenomenon. Arbitrage presents the average investor with the greatest opportunities they may ever have to generate high returns with low risk. Every year many arbitrage deals come along that are within every investor’s grasp . . . if you learn how. Warren Buffett and the Art of Stock Arbitrage takes you behind the scenes for a serious exploration of arbitrage techniques that work. I suggest you study and put into practice these simple concepts.”
—Gabriel Wisdom, author of Wisdom on Value Investing and syndicated radio host
"The use of arbitrage and special situation investing has always been Warren Buffett’s golden lever; yet few investors have realized its value in portfolios, until now. Kudos to David Clark and Mary Buffett for finally bringing these strategies to light and revealing the final puzzle pieces in Buffett’s great career."
-- Timothy P. Vick – Senior Portfolio Manager, The Sanibel Captiva Trust Co., author, How to Pick Stocks Like Warren Buffett
About the Author
For over twenty years, Mary Buffett has been considered a leading authority on the subject of Warren Buffett’s investment methods. Her international bestselling investment books, co-authored with David Clark—Buffettology, The Buffettology Workbook, The New Buffettology, The Tao of Warren Buffett, Warren Buffett and the Interpretation of Financial Statements, The Management Secrets of Warren Buffett, Warren Buffett and The Art of Stock Arbitrage, and The Warren Buffett Stock Portfolio—have been translated into twenty-four foreign languages and are considered “investment classics” the world over. Ms. Buffett is an international speaker, entrepreneur, political and environmental activist, and has appeared on television as one of the top finance experts worldwide. She has been the principal speaker for prestigious organizations around the world. Ms. Buffett has worked in a wide range of businesses including extensive work as a consultant to several Fortune 500 companies. She is an associate of the top ranked UK Buffettology Fund in the United Kingdom. In 2013 she became a contributing blogger to the Huffington Post. The blogs and information about the UK Buffettology Fund are on her website MaryBuffett.com.
For over twenty years, David Clark has been considered the world’s leading authority on the subject of Warren Buffett’s investment methods. His international bestselling investment books, co-authored with Mary Buffett—Buffettology, The Buffettology Workbook, The New Buffettology, The Tao of Warren Buffett, Warren Buffett and the Interpretation of Financial Statements, The Management Secrets of Warren Buffett, Warren Buffett and The Art of Stock Arbitrage, and The Warren Buffett Stock Portfolio—have been translated into more than twenty foreign languages and are considered “investment classics” the world over. He holds a B.S. degree in finance and a law degree from the University of California, Hastings College of the Law. He is presently writing Berkshire Hathaway: Fortress of Capital, a corporate biography. When not consumed with matters of finance, he is engaged in the second great passion of his life, which is trial law and maintains an active national practice.����
Excerpt. � Reprinted by permission. All rights reserved.
CHAPTER 1
Overview of Warren’s Very Profitable World of Stock Arbitrage and Special Investment Situations
The world of arbitrage and special situations is enormous. It can be found anywhere in the world where commodities, currencies, derivatives, stocks, and bonds are being bought and sold. It is the great equalizer of prices, the reason that gold trades at virtually the same price all over the world; and it is the reason that currency exchange rates stay uniform no matter where our plane lands. A class of investors called arbitrageurs, who make their living practicing the art of arbitrage, are responsible for this.
The classic explanation and example of arbitrage is the London and Paris gold markets, which are both open at the same time during the day. On any given day, if you check the price of gold, you will find that it trades virtually at the same price in both markets, and the reason for this is the arbitrageurs. If gold is trading at $1,200 an ounce on the London market and suddenly spikes up to $1,205 on the Paris market, arbitrageurs will step into the market and buy gold in London for $1,200 an ounce and at the same time sell it in Paris for $1,205 an ounce, locking in as profit the $5 price spread. And arbitrageurs will keep buying and selling until they have either driven the price of gold up in London, or the price down in Paris, to the point that the price spread is gone between the two markets and gold is once again trading at the same price on both the London and Paris exchanges. The arbitrageurs will be pocketing the profits on the price spread between the two markets until the price spread finally disappears. This goes on all day long, every day that the markets are open, year after year, decade after decade, and probably will until the end of time.
Up until the late 1990s the exchange of price information and buying and selling in the different markets was done by telephone, with arbitrageurs screaming orders over the phones at traders on the floors of the different exchanges. Today it is done with high-speed computers and very sophisticated software programs, which are owned and operated by many of the giant financial institutions of the world.
STOCK ARBITRAGE
A very similar phenomenon occurs in the world of stock arbitrage, only instead of arbitraging a price difference between two different markets, we are arbitraging the price difference between what a stock is trading at today versus what someone has offered to buy it from us for on a certain date in the future—usually anywhere from three months to a year out, but the time frame can be longer. The arbitrage opportunity arises when today’s market price is lower than the price at which someone’s offered to buy it, which lets us make a profit by buying at today’s market price and selling in the future at a higher price.
As an example: Company A’s stock is trading at $8 a share; Company B comes along and offers to buy Company A for $14 a share in four months. In response to Company B’s offer, Company A’s stock goes to $12 a share. The simple arbitrage play here would be to buy Company A’s stock today at $12 a share and then sell it to Company B in four months for $14 a share, which would give us a $2-a-share profit.
The difference between this and your normal everyday stock investment is that the $14 a share in four months is a solid offer, meaning unless something screws it up, you will be able to sell the stock you paid $12 a share for today for $14 a share in four months. It is this “certainty” of its going up $2 a share in four months that separates it from other investments.
The offer to buy the stock at $14 a share is “certain” because it comes as a legal offer from another business seeking to buy the company. Once the offer is accepted by Company A, it becomes a binding contract between A and B with certain contingencies. The reason that the stock doesn’t immediately jump from $8 a share to $14 a share is that there is a risk that the deal might fall apart. In which case we won’t be able to sell our stock for $14 a share and A’s share price will probably drop back into the neighborhood of $8 a share.
This kind of arbitrage might be thought of as “time arbitrage” in that we are arbitraging two different prices for the company’s shares that occur between two points in time, on two very specific dates. This is different from “market” arbitrage where we are arbitraging a price difference between two different markets, usually within minutes of the price discrepancy showing up.
It is this “time” element and the great many variables that come with it that make this kind of arbitrage very difficult to model for computer trading. Instead, it favors hedge fund managers and individual investors like Warren, who are capable of weighing and processing a dozen or more variables, some repetitive, some unique, that can pop up over the period of time the position is held. It is this constant need to monitor the position and interpret the economic environment that brings this kind of arbitrage more within the realm of art than science.
� 2010 Mary Buffett
Most helpful customer reviews
0 of 0 people found the following review helpful.
good book, easily readable
By buckeye
good book,easily readable,informative.
37 of 42 people found the following review helpful.
For the first time you get a GLIMSPE into Warren Buffett's Success - An Absolute Gem!!!
By Richard of Connecticut
By way of transparency, I have been an investor for 40 plus years, and a student of Warren Buffett since 1968. This short 176 page book is one of the most remarkable investment books written in a long time. I know, I have read and dissected them all. I would urge all professional investors to read and absorb the contents of this book. I would urge all amateur investors to read it and begin to get a feel for how Buffett thinks.
Buffett has had two secrets that were available for all to see, but no one has ever written a word about them. The books and magazines that have written countless stories about his investment success have largely ignored what is really the core of his success. This book is the subject of one of those secrets. At the end of this review I will share with you his other secret as a supplement since it is outside the scope of a proper review.
Buffett's great secret is that he has always told us what to do, how to invest, and how to think like an investor. However, the core of his success comes from doing something other than what he has talked about all these decades. That secret is that Buffett heavily invests in takeovers, derivatives, and options, all of which are instruments that he has constantly criticized in public and other forums.
He has made a fortune in this arena both for Berkshire Hathaway and for himself privately. As you know he takes a nominal salary from Berkshire. At the same time outside of his ownership of Berkshire stock, Buffett has amassed hundreds of millions of dollars on these alternative investments which are the subject of this book. This success was achieved using very little wealth to begin with. It may seem like an anomaly that the man who created the term "financial weapons of mass destruction" is himself an investor in such instruments.
The subject of this book is how Buffett uses arbitrage to achieve outside inordinate returns that will blow your mind out as an investor. Two professors requested that they be allowed to basically audit the investment performance of the Berkshire Hathaway investment portfolio for a period from 1980 to 2003, or 23 years. What they found was that there were 261 investments that achieved an annual rate of return that equaled 39.4%.
Of the 261 investments, there were 59 of them involving the technique known as arbitrage. These 59 investments by themselves produced an extraordinary 81.3 percent annual return. If you took the 59 arbitrage investments out of the portfolio and assumed they never happened, the overall returns dropped from 39.4 percent to 26.9% annually during the 23 year period.
The researcher's eyeballs must have bulged outside of their sockets. These returns are real, true, and for most investors, not to be believed. How did Buffett do it, and can you do it also? The answer is that Buffett used the same technique he was taught by Benjamin Graham when Graham was the master professor and mentor at Columbia Business, and Buffett was the student.
Arbitrage is a technique used by every major trading desk in every banking firm in the country. It has made billions for the likes of Goldman Sachs, Morgan Stanley, Lehman Brothers, and it has been going on for more than 100 years. Former Secretary of the Treasury Stephen Rubin ran the Goldman arbitrage desk, and that's how he created his fortune at Goldman. Every major hedge fund is involved in arbitrage, and you can be too.
The authors of this book which includes Buffett's former daughter-in-law have put together the finest contemporary explanation of the techniques that Buffett uses even today to create greater fortunes for himself and his investors. The authors creatively have put together an easy to read blueprint of the master's techniques, and you need to read this book if you are an investor. Here's a few of the concepts you will learn about.
* Arbitrage is more an art than a science. You need to develop an intuitive feel for juggling a dozen variables in your mind to see if a deal is a deal or not?
* The authors lay out for you the actual simple equations that Benjamin Graham taught Buffett to work with when he was doing an arb transaction. I promise you that you will be able to use them as well.
* As you escalate the number of positions you establish in your account, you increase the probability of error. Diversification does not help you here.
* Contrary to normal thinking, Buffett believes that he can remove most of the risk from an arbitrage transaction, and therefore he is willing to borrow to buy a larger position. As he puts it, if most of the risk of borrowing money has been removed - use leverage.
* In Chapter 11, the authors cover Berkshire's actual purchase of the Burlington Northern Santa Fe Rail Road as an easy to follow case study. You will love it.
It's all explained here, it's clear, it's to the point, and it's a secret that Buffett never talks about. You simply must read this book to refine your investor skills, and play the game the way the big boys play the game. It is a very simply but adequate introduction to the arbitrage concept which is buying the securities of companies where announced takeovers have taken place, and using the time value of money to create highly significant returns.
Supplement - Warren Buffett's other big secret is that he is in the insurance business, the most profitable business ever created. People and companies pay insurance companies a premium and then do everything in their power to make sure that you as the insurance company never have to pay out any proceeds. It's like the fellow that takes out a million dollars of insurance on himself, and then desperately does everything he can to make sure he stays alive. Insurance companies make fortunes, and Buffett learned this from Benjamin Graham.
In private equity, the funds buy great companies, make them better and then in a few years attempt to take them public again and cash out. Buffett plays it the insurance way, which is to buy great companies, and then own them forever because the premiums that the insurance companies collect allow you to own the investments forever. Why would you ever want to sell a fantastic investment, and that is why Buffett for 60 years has played the insurance model, and everybody misses the point. Thank you for reading this review.
Richard C. Stoyeck
10 of 10 people found the following review helpful.
Beginners may have illusions of grandeur that won't come true
By Mr. Wan
Mary Buffett makes it sound like risk arbitrage is a huge profit center and all we need to do is buy stocks that are being taken over in order to make a fortune with high annual returns.
First, risk arbitrage is a highly researched and analyzed field. It is very competititve. There is nothing new in this book. Second, she exaggerates the returns you can expect. She says you could have made an annualized return of 55% when Berkshire bought BNSF!!! How you ask? By borrowing $1,000,000 and paying 2.5% interest, for a total interest chage of $25,000. You'll make $30,000 off the spread between the $97 you can pay for BNSF in the open market and the $100 that Berkshire will pay you in 3 1/2 months. Deduct the $25,000 interest from your $30,000 spread profit, and you made a cool $5,000 off a $25,000 investment, or a 20% return!!! Sounds great doesn't it? The problem is, you or I cannot simply call a broker and ask for a million dollars and promise to pay them back 3 1/2 months later, loan plus interest, with no collateral. Maybe the Buffetts of the world can and even then, I'm sure the collateral would have to come from somewhere. So, if you borrow $1,000,000 you're going to have to put up collateral of another $1,000,000 and tie it up until you pay off the loan. This drops your profit margins down substantially. In this example, had you made the same investment with your collateral as you did with the loan, you'd make $35,000, or 3.5% on that million dollar investment backed with another million dollar loan over 3 1/2 months. Not exactly the returns legends are made of.
Fine, risk arbitrage is an opportunity that should be explored, but don't expect the 50% plus annual returns she's telling you that you can get.
Mary's books are simple and easy to read. This book itself is short, and should be considered nothing more than an introduction to risk arbitrage, on how Warren Buffett reportedly goes about doing it. Her book could have even been shorter had she not gone through great strides explaining that in an arbitrage deal, you want to buy stock of the company being taken over, as if you'd mistakenly want to buy the company making the acquisition thinking that's arbitrage.
I'm giving this book 3 stars because it's a decent introduction to risk arbitrage, but it's clearly being explained by someone who thinks us investors can just come up with million dollar loans and consider the interest as the principle. For her to say that or think that really makes me question if she's ever had any decent experience doing risk arbitrage and isn't just piggybacking off her name and association with Buffett. Severe disappointment.
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