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

Mary Buffett , David Clark
2.0 out of 5 stars  See all reviews (3 customer reviews)
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Book Description

6 Jan 2011
'Give a man a fish and he eats for a day. Teach him to arbitrage, and he will eat for a lifetime' Warren Buffett Warren Buffett and the Art of the Stock Arbitrage is the first book to explore the secret world of Buffett's arbitrage and special situations investing. 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 has made Warren Buffett the world's greatest investor. This book examines Buffett's special brand of arbitrage investing, which involves taking advantage of short term price discrepancies that often occur when one company offers to buy another company. Though these discrepancies are small they offer him almost risk free investment opportunities that have given him an average annual rate of return of 23% on his invested capital. In the years that Buffett's normal portfolio of long term investments has done poorly it is his investments in arbitrage situations that have lifted his performance to the record levels that have made him the second richest man in the world. Mary Buffett and David Clark, the authors of four best-selling books on Warren Buffett's investment methods, take the reader deep into the world of Buffett's arbitrage and special situation operations, giving us his strategies, his equations for determining value, and dozens of examples of his investments in this very lucrative segment of Buffett's investment operations. They offer detailed analysis and explanations of Buffett's arbitrage and special situations operations and techniques for the first time ever.

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Warren Buffett and the Art of Stock Arbitrage: Proven Strategies for Arbitrage and Other Special Investment Situations + The Warren Buffett Stock Portfolio: Warren Buffett Stock Picks: Why and When He is Investing in Them + Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage
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Product details

  • Hardcover: 176 pages
  • Publisher: Simon & Schuster Ltd (6 Jan 2011)
  • Language: Unknown
  • ISBN-10: 0857201697
  • ISBN-13: 978-0857201690
  • Product Dimensions: 15.2 x 19.9 cm
  • Average Customer Review: 2.0 out of 5 stars  See all reviews (3 customer reviews)
  • Amazon Bestsellers Rank: 377,765 in Books (See Top 100 in Books)

More About the Authors

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Product Description

About the Author

Mary Buffett, who was married to Warren Buffett's son, is CEO of Superior Assembly. David Clark, a friend of the Buffett family for more than 30 years, is a portfolio analyst and lawyer.

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Front Cover | Copyright | Table of Contents | Excerpt | Index | Back Cover
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Customer Reviews

2.0 out of 5 stars
2.0 out of 5 stars
Most Helpful Customer Reviews
1 of 1 people found the following review helpful
By Zsolt
Format:Hardcover|Verified Purchase
Be careful! This book has nothing to do with Warren Buffet, very basic, no real added value, it is like an academic math book with paragraphs explainig what is the result of 1+1.....
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2.0 out of 5 stars Too basic 26 Jun 2013
By Andrew Dalby VINE VOICE
This is a book that is like teaching Granny to suck eggs. It is short with very little technical content and elementary maths. If you are into investments and arbitrage then everything in this book is obvious. If you know anything about risk and investing then it is also obvious. If you are not into investing or do not know what arbitrage is then you are not going to need the book as you will never be able to use the advice. Mostly because it only makes sense if you are a large institutional investor who can use leverage to make their position count and who does not have to pay the killer fees that small traders have to pay.

The book is really cashing in on the name and Warren has nothing to do with it other than one of the authors having his surname (she was married to his son). If you see it in a reduced to clear sale it might be interesting but otherwise it is not worth the investment.
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0 of 1 people found the following review helpful
One of the great "secrets" of Warren Buffett's wealth accumulation was his skill in arbitrage investments. As an example: Berkshire's stock portfolio performance from 1980 to 2003 had an average annualised return of 39.3% from 261 investments - 59 arbitrage deals produced an annualised return of 81.3%. Those deals had a huge effect on Berkshire's overall performance. Arbitrage was the secret for great results in down years for the S&P500 - when the market was taking a nosedive, he leveraged up on the arbitrage deals and made significant returns.

Buffett's ex-daughter-in-law Mary has written a series of books on his investing style, and this one is a perfect example of the "Do as I say, not as I do" nature of Buffett-watching. You won't hear him talk of arbitrage in his public pronouncements, but as the numbers above demonstrate, they're a very real factor in his success over time.

There are two specific keys to Buffett's success with arbitrage - and the fact that he hasn't put himself or his company in danger:
1) he focuses on "certain" or near-certain events: publicly announced, friendly takeovers in the main, and
2) rather than use leverage, he focuses on an "annualised" return, and uses the insurance float his company possesses to provide him with the investment funds to act.

The book is full of practical examples of Buffett's arbitrage - you'll spot the flaws in some that couldn't be achieved today because of changes in market conditions. Smart readers might also vividly recall that the News/Sky public takeover would have fitted neatly as an example - but would have cost a traditional arbitrageur dearly.

But focus on "certain" events, and avoid leverage, and you might spot some opportunities after reading this book in your lifetime.
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Amazon.com: 3.4 out of 5 stars  16 reviews
32 of 37 people found the following review helpful
5.0 out of 5 stars For the first time you get a GLIMSPE into Warren Buffett's Success - An Absolute Gem!!! 18 Nov 2010
By Richad of Connecticut - Published on Amazon.com
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
9 of 9 people found the following review helpful
3.0 out of 5 stars Beginners may have illusions of grandeur that won't come true 15 Feb 2011
By Mr. Wan - Published on Amazon.com
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.
15 of 17 people found the following review helpful
2.0 out of 5 stars Disappointing 6 Dec 2010
By Value Investor - Published on Amazon.com
Format:Hardcover|Verified Purchase
I had extremely high hopes for this book, thinking it could have a place on my bookshelf next to Joel Greenblatt's "You can be a Stock Market Genius" or "The Intelligent Investor" in terms of simple, clear thinking to find value and exploit market inefficiencies.
I was sorely disappointed. The math is overly simplistic- the authors apparently do not know how to compound interest (In the book, the authors estimate that 5% return a month is 60% per year, even though the real return is nearly 80%!)

Time and time again, the examples are overly simplistic to the point where one cannot learn anything of value. (Ex: If a company offers to buy a share of stock for $50, and it is trading for $40, you can buy the stock at $40 and make $10!)

These are just some of the examples that cause me to doubt whether the authors understand the books concepts in anything more than a superficial manner.
3 of 3 people found the following review helpful
3.0 out of 5 stars A Quick And Somewhat Useful Read 22 July 2013
By Gregory McMahan - Published on Amazon.com
Arbitrage as defined by the authors of the book seeks to take advantage of known price discrepancies typically occurring either in two different locations or at two different points in time. In the latter situation, the arbitrageur often knows the price in the future with some reasonable certainty. The book goes into great detail discussing how Warren Buffett has taken advantage of time-based arbitrage to make outsized profits. It first carefully guides the reader through the basics of arbitrage as it is purportedly practiced by Mr. Buffett, and then devotes many chapters to various spins on the basic idea of time-based arbitrage.

The authors present to the reader a basic arbitrage strategy that ignores transaction costs and taxes. Granted, trading costs have come down tremendously, but unless you are an investor of considerable means, these costs are still somewhat prohibitive. Moreover, taxes reduce the expected return from arbitrage operations, over and above the reduction in return due to the time element and the possibility that the deal under consideration either isn't as certain as one originally thought or just doesn't pan out. Finally, for the overwhelming majority of arbitrage situations, which by the way are very well followed on The Street (thus reducing considerably the possible gain), one still needs to deploy massive amounts of capital in order to make outsized profits- something that still confers to Mr. Buffett a considerable advantage, given the many billions at his disposal.

According to the authors, the two critical variables in any time-based arbitrage situation are the certainty of the deal and the time element. As for the latter, they failed to carefully elaborate on how the time element can greatly reduce expected returns; specifically, the longer one has to wait for the deal to go through, the lower the expected return from the arbitrage operation. The authors generally hide behind the stature of Buffett and Graham to present to the reader a method that basically boils down to an annualized net-benefit analysis, and they exercised great care to hedge their approach by saying that arbitrage operations are more art than science. I believe that they should have disclosed the very real fact that in most publicly accessible arbitrage situations, some investors (almost always the bigger fish at the venerable names on The Street) know more about the deals and know it sooner than others; furthermore, this latter point explains why expected gains have tended to decline over the years. Indeed, they also should have disclosed that there are often a few other variables, some of which may even defy quantification, that tend to rear their heads in such deals, and that each deal almost always has its own unique wrinkles.

Over the course of reading the book, I recognized a few problems, some run-of-the-mill, and some potentially mortal, with the methods outlined in the book. First off, the retail investor could be wrong on the timing of the deal. Granted, this is always an ever-present risk, and is somewhat mundane. Next, you could be wrong on your certainty that the proposed deal will actually be completed. As for this potentially mortal investment risk, many little-guy investors seek to hedge it by taking the temperature of the market with regard to the deal. Also, there may not be enough of these deals of a sufficient quality to be worthwhile. One has to figure that some of these deals probably won't work out, and one has to have a large capital base to make the numbers work after factoring in the likelihood of one or more deals in (investment) play not going as planned. Moreover, for the little guy, as mentioned before, the arbitrage operations have taxation dimensions and transaction costs that together can reduce expected returns to mediocrity. This is no small point, as arbitrage raises activity level and costs but may or may not pay off in additional return.

Additionally, the authors do not touch upon opportunity costs and ways to adjust for it. Finally, the authors look only at the arbitrage transaction, and not, for example, life after the transaction. Here, perhaps a personal anecdote from my own experience can shed light on what I mean. A few years back, Unilever announced its intention to purchase Alberto-Culver (you know, the Alberto VO 5 people). At the time, I happened to have good `ol `Berto in my taxable account and Unilever in my IRA. I immediately recognized this as a better buy-and-hold situation, as the union of the two made for an even better company (Berto paid a rising dividend and sported a clean balance sheet with ample cash and no debt; Unilever had global reach and economies of scale working for it; the two together would have greater earnings combined right off the bat, and production synergies as well as mutual scale economies would tend to magnify earnings over time, and Unilever's reach would extend `Berto's brand in more places). Naturally, the market looked favorably upon the deal, so the share price of `Berto made an immediate and dramatic rise to within a few points of the deal price. So, instead of buying more of `Berto, I bought more of Unilever (as an aside, I initially hated Unilever, as I had planned on milking `Berto for steadily rising dividend checks for years to come). Ultimately, the deal closed, and I made out on my position in Alberto Culver; however, I made out even better, and still make out quite well, with my position in Unilever. Arbitrage is great for one-off gains, but one can't regularly feed off those like fat, rising dividend checks over time.

In sum, the book provides investors with significant sums of money (say, in the 250K range plus) an interesting possibility for making some decent money. However, in the end, the method relies upon the law of averages and engaging in many deals for its overall success, which I hasten to add, is not guaranteed. This book is a quick read on the topic, and potential readers would do well to use it more to learn about the (bare) basics of arbitrage and very carefully consider putting its methods into potentially profitable practice.
2 of 2 people found the following review helpful
4.0 out of 5 stars Warren Buffett and the Art of Stock Arbitrage - Buffett and Clark (Scribner) 4 Feb 2011
By BlogOnBooks - Published on Amazon.com
Being known as America's most famous investor means there are a lot of books about you. Biographies, profiles, "lessons from" tomes, you name it. Buffett is this generation's most famous money man. But a new book on the subject zeros in tightly on where the Oracle of Omaha makes his biggest killings these days - stock arbitrage.

Authors Mary Buffett (Buffett's former daughter-in-law) and (Omaha business writer) David Clark obviously have a special window in to the world of Buffett and according to them, Buffett's use of arbitrage is the single biggest device he uses to fuel his outsized returns. In this small, 151 page book, Buffett and Clark reveal a relatively small number of methods that Buffett uses to make money on stock spreads. All of them relate to takeover activities (M&A) or various forms of corporate liquidations where Buffett sees an opportunity to make relatively quick money (six months or less) on market spreads. All his transactions are in the full light of day and require heightened levels of certainty before the investor will lay down his bet. Part of the reason for this requirement is that Buffett is often using borrowed money to make a profit on what amount to relatively small fluctuations in a stock's price over the alloted time window. Sometimes a profit of 3% is worth going after if the time frame is small and the money is margined. This is where the `certainty' factor comes into play.

The authors look at a variety of situations where arbitrage can work in the investors favor. Corporate takeovers (though Buffett prefers friendly, like industry takeovers over hostile attempts), mergers, taking companies private and liquidations are all covered here. But again, a state of certainty is essential to all deals. The book is thin, easy to comprehend and written in a way where any investor can look for the signs and follow the lead. To have an inside window to Warren's most powerful tool is valuable enough. To have it explained in such common terms, makes this read a joy.
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