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One Secret of Buffett's Early Exceptional Market Returns,
This review is from: Warren Buffett and the Art of Stock Arbitrage: Proven Strategies for Arbitrage and Other Special Investment Situations (Hardcover)
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.