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Warren Buffett and the Art of Stock Arbitrage: Proven Strategies for Arbitrage and Other Special Investment Situations

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February 02, 2011 – Comments (2) | RELATED TICKERS: BRK-A , BRK-B

 

OK, so I got sucked into buying a copy of the new book "Warren Buffett and the Art of Stock Arbitrage: Proven Strategies for Arbitrage and Other Special Investment Situations" this morning.  It's amazing how one can get a new book today just by pushing a few buttons.  This is the first real book that I've bought on my iPad.  I have to say that readon on it is a fairly enjoyable experience.  The glare from the lights in the ceiling is a little annoying, but to me the iPad definitely seems more user friendly than the Kindle (of course at several times the price).

It's a really fast read and so far (60-something pages in) a little on the elementary side, but it's still interesting...at least to me.

Anyhow I figured that I'd share an interesting quote from the book with everyone.  I never realized how heavily involved in merger arb and special situations Warren Buffett was.

In professors Gerald Martin and John Puthenpurackal's study of Berkshire Hathaway's stock portfolio's performance from 1980 to 2003, they discovered that the portfolio's 261 individual investments had an average annualized rate of return of 39.3%.  Even more amazing was that out of those 261 investments, 59 of them were identified as arbitrage deals.  And those 59 arbitrage deals produced an average annualized rate of return of 81.28%!  Warren's arbitrage performance not only beat his regular portfolio's performance, it also stomped the average annualized performance of every other investment option in America by a mile.  No one - be it individual or firm - even came close...

Martin and Puthenpurackal's study also brought to light the poferful influence of Warren's arbitrage operations had on Berkshire's stock portfolio's entire performance.  If we cut out Warren's 59 arbitrage investments for that period, we would find that the average annualized return for Berkshire's portfolio drops from 39.38% to 26.96%.

Interesting stuff.  This leads me to several conclusions, merger arb can be a powerful investment tool if you're good at it and that Berkshire's returns going forward won't be anywhere near what they were in the past given the fact that it is now too large to move the needle so to speak with this type of transaction. 

One has to wonder if these sorts of returns are even available from merger arb today given the massive number of funds out there trying to exploit these situations and the technology that is now at their disposal.

Deej

2 Comments – Post Your Own

#1) On February 02, 2011 at 2:09 PM, BlackSwanCapital (76.71) wrote:

I've always been leery of "gimicky" reads that invoke a famous money manager's name to sell copies... The book sounds interesting however -  I was largely unaware that Merger Arb could produce those kinds of returns...

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#2) On February 02, 2011 at 2:37 PM, TMFDeej (99.31) wrote:

Hey BlackSwanCapitalI know what you're saying.  I haven't read any other of Mary Buffett's books on the famous investor, but given the lack of books on investing in special situations out there I figured that I'd give this one a try.

It's not even close to as good as You Can be a Stock Market Genius, but it's not terrible either.

Deej

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