Warren Buffett and the Art of Stock Arbitrage

[cjrocks]

Has anyone read this book i was thinking about reading it. I scanned through it and thought that maybe i should share it with the fine people here on the fast lane forum.

"Give a man a fish and you will feed him for a day. Teach a man to arbitrage and you will feed him forever." ---Warren Buffett

 

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[Rickson9]

Although I understand the basics of Warren Buffett's techniques around risk/merger arbitrage I don't think that I would be very good at it myself. His writings on his experiences are revealing and educational, however, I am unable to calculate the probability of success of a merger or the consequences of it's failure. Buffett and Munger are very strong at this!

Buffett calls arbitrage "workouts" as he did in this quote:

"Once, the word [arbitrage] applied only to the simultaneous purchase and sale of securities or foreign exchange in two different markets. The goal was to exploit tiny price differentials that might exist between, say, Royal Dutch stock trading in guilders in Amsterdam, pounds in
London, and dollars in New York. Some people might call this scalping; it won’t surprise you that practitioners opted for the French term, arbitrage.

"Since World War I the definition of arbitrage - or “risk arbitrage,” as it is now sometimes called - has expanded to include the pursuit of profits from an announced corporate event such as sale of the company, merger, recapitalization, reorganization, liquidation, self-tender, etc. In most cases the arbitrageur expects to profit regardless of the behavior of the stock market. The major risk he usually faces instead is that the announced event won’t happen."

What makes a workout attractive is that they are not dependent on the market - they are limited time binary outcomes - yea or nay. How Buffett and Munger were able to predict these outcomes with such uncanny accuracy is the key to their success in this area!

Best regards.

 

[Rickson9]

The following may be an interesting read for those who have an interest in merger arbitrage:

2001 merger arbitrage

Best regards.