Forum Archive Index - March 2003

[Travis Morien <travismorien@yahoo.com>]

--- prhughes@value.net.nz wrote:
> Travis
> 
> You wrote "Buffett made his money in 1987 by
> arbitrage", would it 
> please be possible for you to explain further and
> perhaps provide an 
> example of what Buffett did.

Merger arbitrage has been one of Buffett's major
strategies throughout his career.  He learnt to do it
while working at the Graham Newman Corporation, Ben
Graham was heavily into it as well.

I'll just a generic example, though if you want more
info you should read some of the better Buffett books
like "How To Pick Stocks Like Warren Buffett" by
Timothy Vick.  

(By the way, I'm not keen on the Mary Buffett
"Buffettology" books, they provide a very
oversimplified view of Buffett's methods and I think
the book by Vick, as well as "Warren Buffett Way" by
Hagstrom do a better job of it.

If a company announces that it is likely to be taken
over for $5 a share in 1 month, and the stock trades
at $4.90, you would make $10c (2%) in one month if the
merger went through.  On an annualised basis that is a
fairly decent return.

The risk is that the merger may not go through.  If
the share was trading at $4.70 before the merger was
announced then you've got a 20c downside, and a 10c
upside.  If you think the merger is 90% likely then
your expected profit is 90% x 10c - 10% x 20c = 9c -
2c = 7c.

Buffett does this often as an alternative to cash, for
short term holdings.  Buffett has said that his
annualised results in merger arb have been better than
30%pa over the years.
> 
> My understanding of arbitrage is say....buy a stock
> in NZ sell in 
> Aus taking into account price differential and
> exchange rates.

There are many forms of arbitrage.  At my web site is
the aus.invest FAQ.  Look at the section on hedge
funds, I talk about several flavours of arbitrage
there.


> 
> AIR.....good reply.
> 
> Value investment is not difficult especially if you
> had a few million 
> to throw at it. Buy around the bottom of the Bear,
> Sell around the 
> Bull top, then go fishing in the in between time,
> which means you 
> would be totally out of the market at present.

Value investment can be done on a top down or a bottom
up basis.  I don't know what you mean with this "value
investors would be totally out at the moment" bit.  I
made many of my clients more than 20% in 2002 through
value oriented stock picking.

Travis
www.travismorien.com


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