Trade Like Warren Buffett (James Altucher) 0 comments

I always look for new viewpoints when choosing new investment books to read, because that is where the value-add lies. No point reading about ideas/concepts which are rehashed versions of what one already knows ...... it would be a waste of time.

That is where the value of this book lies. The title alone is promising, for it suggests that it is not another eulogy to Warren Buffet's buy-and-hold strategy which the mass media have promulgated outrageously (probably with the acquiescence of Buffett himself).

The book is divided into different chapters on the various investment strategies and instruments adopted by Warren Buffett, which may not be familiar to Buffett fans who primarily know him through his widely publicised buy-and-hold type stock investments in Gillette, American Express, Disney and of course Coca-Cola. The objective is to present the other main facets to Buffett's investment selection process.

At this point it is useful to outline what the author considers as Buffett's three main plays. Buffett himself has divided his investment activities into three main groups: generals, controls and workouts. Generals are the long-term value plays we all know him for; controls are situations where he accumulates a majority stake and ends up with control of the company --- suitable for highly-undervalued stocks trading below NTA where corporate control confers ability to appoint new management to re-direct operations and unlock value, as well as control of the liquidation process so that the shareholders can secure good returns (the best example is Berkshire Hathaway). Finally, workouts are the special situational plays which actually form half or more of Buffett's profits, yet are often given little press.

Although the author gives some coverage (a chapter or two) on the first two investment categories, it is the third --- the workouts --- that he devotes most of the book to. That's because these workout plays are most like what we know as trading, in terms of investment horizon and holding period, use of leverage to magnify gains, focus on price and situation rather than business fundamentals. Thus it is that individual chapters are devoted to various workout plays that Buffett has been involved in:

Merger arbitrage - betting on consummation of a merger
Relative value arbitrage - playing the spread between a listed parent and a listed subsidiary
PIPEs - Private Investment in Public Equities. Private placements usually take the form of share placements at discounts or as convertibles (Gillette and Salomon investments were in fact born of PIPEs)
Junk bonds - High-yield bonds of low-quality companies
Closed-end fund arbitrage - Convergence of closed-end fund towards its net asset value (these funds typically trade at a discount to NAV due to tax issues and illiquidity of holdings)
Fixed-income arbitrage - plays on spreads between different bonds (eg. between corporate bonds and Treasuries)

One common thread that runs through these investments, and repeatedly emphasised by the author, is that Buffett always considers multiple exit strategies. In other words, should his workout play fail, he wants sufficient margin of safety or an alternative exit route. For example, he desires to be comfortable enough with the investment per se to hold for a longer-than-expected period even if the workout fail to work (eg. the merger fails to go through in his merger arbitrage play). This is worth learning for any investor. It reflects early consideration of the risks of an investment and not just the potential returns, thinking about the "what-ifs", thus adding another layer to the investment analysis process ---- something that will become more important as assets under management grow.

The various investment instruments and arbitrage strategies were explained in great clarity by the author who is himself a hedge fund partner. However, it is a bit disjointed towards the end and there are some interviews with certain fund managers which do not seem to serve any purpose. Skip judiciously.