1 Easy strategy to trade like Warren Buffett — Investment Monks

Yes, you read it right. Warren Buffett considered the “best and world’s greatest Value Investor” has another side which is not well known.

James Altucher’s book (Trade like Warren Buffett) reveals the various strategies used by Warren Buffett in his trading in the early years of his career.

Buffett essentially built his first $25 Million with 3 techniques (highlighted in the 1971 classic SuperMoney)

1. Cigar butt technique — buying stocks that were selling for less than the tangible assets. Buffett would accumulate enough shares that eventually a change of control would occur, giving him control over how the assets would be disposed.
2. Value Investing, combined with Charlie Munger’s ideas on growth and brands.
3. Special arbitrage situations, distressed debt, spin-off’s and merger arbitrages.

I will share some snippets from this legendary book — Trade like Warren Buffett here.

Strategy#1 — Merger Arbitrage

So what is Merger Arbitrage ? A potential merger arbitrage situation is created when any merger is announced in which the target is a public company.

For instance, if company XYZ announces it is acquiring company ABC for $15/share in cash and company ABC is trading at $14, then you can buy shares in ABC with the idea that those same shares will be sold to XYZ when the deal closes at $15/share.

In 1963, Buffett presented the details of straightforward merger situation in TNP (Texas National Petroleum) by Union Oil. A deal was announced and Buffett determined what he would do with each category of security that TNP had -

TNP had debentures yielding 6.5% and would be called once the deal was done.

Common stocks for which Union Oil was going to pay $7.42 per share

Additionally, Buffett noted that the “Risk of shareholders approval was nil”, since the deal was negotiated by the controlling shareholders.

There was no anti-trust problems or legal problems

When the deal had closed, Buffett made an annualized return of 21%

How to Arbitrage like Warren Buffett ?

Buffett had effectively outlined the 4 conditions that an arbitrageur must ask in his 1988 letter

• What can cause the deal to fail ?
• What is the time it will take for the deal to occur ?
• What other opportunities might be available ?
• What are you going to do if the deal does not go through ?

As recently as 2021, Buffett made similar Arbitrage move, loading up on his existing portfolio of ATVI (Activision Blizzard). Currently under FTC scanner, will ATVI be the next smart move from this Master Investor ?