Saturday, October 02, 2021

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

Stock arbitrage involves making money from pricing differences from essentially the same thing. This book outlines some of the ways that Buffett had made money primarily by relying on differences in value over time. The goal is to minimize most of the risk, while still achieving significant upside. A lot of the items involve changes in companies. A large conglomerate my be priced as the company as a whole. If a section with a large upside is spun off, it could significantly increase in value. Buying the original company is a way to get it on the cheap. Similarly, an acquisition target can often be bought for less than the future acquisition price. A company switching to an MLP that will increase its dividend may be priced with the old dividend in mind.

These seem like fairly reasonable strategies. However, how applicable are they for a retail investor? The ideal time to pounce is when an action appears 100% certain to occur soon, yet has not been fully priced in the market. Are there many of these? Is there enough of a spread that a retail investor can profit with minimal risk? The book gives examples of Buffett's success in some of these, but there is no coverage of his failures. How valid are these today?

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