Learn to invest with Buffett

Chapter 65

Chapter 10 Section 6 How Buffett Avoids Arbitrage Risks
What kind of idiot would invest in an unannounced transfer?As long as you think about it, you can probably guess that it is Wall Street. They are over-brained and always wishful thinking. They think they can get huge benefits from companies that are rumored to be on the verge of being taken over.If you do things by listening to rumors, even if you can get huge benefits, it also means taking great risks.

--Warren Buffett
The way Buffett protects himself from risk is to only invest in companies that have announced their transfers.This sounds commonplace, but it is the most sensible course of action.In fact, so-called arbitrage is basically a time-sensitive investment.Because the amount earned is fixed, the length of time you hold the stock becomes the key to your pre-tax annual rate of return.The longer the term, the smaller the pre-tax annual rate of return, and the shorter the term, the greater the pre-tax annual rate of return.

From 1957 to 1969, during the Buffett partnership period, Buffett once proposed that the annual arbitrage investment behavior will bring continuous and huge profits to the company, and in the year of market decline, it can provide the company with greater competition. space.Once the securities market is short, shareholders and management will start to worry about the company's stock price decline, so most of them tend to sell, liquidate or carry out some part of reorganization.In this way, when the market starts to crash, arbitrage opportunities for investors begin to increase.

After Buffett has dealt with nearly a hundred arbitrage events, he found that almost all of them have an annual rate of return of 25%, which is usually more profitable than a case with an annual rate of return of nearly 100%.Wall Street financiers may listen to hearsay, but Buffett only invests after a formal announcement of a sale or merger.

Investors should be aware that there are certain risks associated with this type of investment.One of them is that, as discussed previously, the transition may take longer than expected.The second is the failure of the final transfer. Generally, it is said that this is a matter of bad luck.There are millions of reasons why a company transfer could take longer than expected, or fail at all.Anything is bad enough.

Investment motto:

There is no frequency distribution in risk arbitrage, every trade is different, and each situation requires a different forecasting judgment.Even so, risk arbitrage works well with some math.

(End of this chapter)