Learn to invest with Buffett

Chapter 62

Chapter 10 Section 3 Merger Arbitrage: Opportunities exist in large companies
Give someone a fish, and he can only eat it for one day; teach him to arbitrage, and he can enjoy it for a lifetime.

--Warren Buffett
Buffett owns Berkshire Hathaway because of an unsuccessful arbitrage that turned him from a stock trader into a long-term investor in the company.At the time the company was trading almost half of its face value in stock and regularly bought shares back through share buyouts.Buffett originally bought shares in the company to wait out the tender and then sell them, an almost risk-free arbitrage because he bought shares below their liquidation value and the company regularly sold for Buy back shares at a higher price.This bilateral margin of safety is characteristic of Buffett-style trading.Either way, it was the "exit" that allowed Buffett to build a company worth over $1000 billion.At that time, the company's CEO was Jack Stanton. He asked Buffett at what price he was willing to sell his shares. Buffett proposed 113-118 US dollars per share. The company continued its acquisitions and offered 111-114 US dollars per share. The price intention to compete with Buffett.Buffett ultimately turned down the company's offer, instead buying more and firing Stanton -- eventually taking on the CEO and chairman roles himself.One can only hope Stanton grabs hold of the stake he may have acquired.In the early days of his partnership, Buffett divided his investing activities into three parts: "general," "workout," and "control."

Investments in the general market rely on long-term value investing, where the value of stocks is primarily determined by discounting face value, while applying some quality criteria (after the 1964 salad oil scandal, Buffett put most of his money in American Express’s Stocks are an example).Control of the market in general is a "boost" (or "downgrade," depending on your point of view) of the general market, which means that Buffett bought enough shares to ultimately control the company.This usually happens with "cigar butt" stocks. Buffett is able to buy heavily undervalued stocks at a substantial discount to face value. He is not opposed to taking over ownership of the company because he can secure his investment can be profitable.He dubs this stock a "cigar butt" stock because if you find a cigar butt on the ground, it might still be worth two more puffs, and that's what it's worth.Regarding weak markets, Buffett said they are securities with a timetable attached,

They arise from a company's operating activities—sales, mergers, reorganizations, divestitures, etc.Here we do not talk about rumors or inside information about the company's development, but focus on the company's publicly announced business activities.Don't start making your own investment decisions until you can see the news in the newspaper or on a statement sheet.Risks are not primarily determined by the overall behavior of the market (although sometimes it is correlated to some extent), but by those factors that disrupt the market so that expected developments do not materialize.These unpleasant factors include antitrust laws or other regulatory actions of the government, shareholder disapproval, tax withholding rules, etc.Profit volume looks thin in many weak markets.However, good forecasting ability combined with short-term holdings yields a solid annual return.In this type of market, investors can obtain more stable absolute profits year after year than in the general market.In any given year, 50% or more of Buffett's profits come from this market weakness.

Investment motto:

What investors need to understand is that there may be many forms of arbitrage in your investment career, such as merger arbitrage, relative value arbitrage, convertible arbitrage, fixed interest arbitrage and many other special forms of short-term operations.In fact, for a particular company, for example, the amount of capital that needs to be invested in a transaction makes some investment options with small market volumes no longer suitable for these arbitrage strategies.In other words, investors who use the arbitrage model to make money should first choose companies with relatively large market capacity.

(End of this chapter)