Can Turtles Fly?

“Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.” -- Old Wall Street Saying I have been reading James Altucher's Trade Like Warren Buffett --a very good book looking at Buffett's less popular strategies--and thought I would comment about Warren Buffett's thoughts on risk arbitrage ( here is an old interview with James Altucher about some topics covered in the book). James referred to Warren Buffett's arbitrage comments in the 1988 Berkshire Hathaway Shareholder letter and I thought I would go straight to the source . Risk arbitrage falls into the category that Buffett calls workouts . Buffett supposedly earned as much as 50% of his returns in some years from arbitrage during his hedge fund days. Nowadays, with Berkshire Hathaway, Buffett rarely does much arbitrage; although he dabbles from time to time, with the Dow Jones takeover by Rupert Murdoch last year being one of his rare acts. Once, the word [arbitrage] applie...

This is a point I have been hammering away for a while but it is important for investors looking at Japan... Japanese stocks have very low ROE (return on equity)! In fact, it has been like this for a long time. The dilemma for Japanese equity investors is that you have a lot of stocks trading at low price-to-book-value but their ROE is very low. How do you make money in this situation? For example, Eliot Pen refers to a Barron's article talking about how Asatsu-DK (TSE: 9747) , a Japanese advertising agency, is trading at very low value (P/B is around 1). Barron's points out that Asatsu-DK has a lot of cash and cross-holdings that are not being valued fully. Its forward P/E of 25 (trailing P/E 29) drops to around 12 if you adjust for the cash and investment holdings. However, its ROE is around 4%--a terrible number. Needless to say, what is causing the low ROE is its cash and investment cross-holdings. If you were a CEO and asked investors to borrow $100 in order to generate $...

I have been of the opinion that the US economy may not suffer terribly, but the equity markets may. A lot of people are expecting the stock market to hold up if we have a mild slowdown or recession. I am not sure. My thinking is similar to John Hussman. In his latest commentary , he speculates on the possibility of relatively major asset price correction while the economy does OK. So in terms of GDP, I would expect to observe some slowing in all categories of expenditure, with the worst showing in residential investment. Still, I doubt that the losses in GDP (the “real” production of goods and services) will be particularly striking or deep. Rather, the current economic downturn is likely to focus its damage on asset prices – the U.S. dollar, home values, low and mid-quality debt, and equity prices (largely through the combination of narrowing profit margins and lower valuations) . In short, I expect that we are in the process of what might be called a “writeoff recession,” where signi...

Here is an article from the Globe Investor magazine (Canada only), where George Athanassakos (I thought I had a long name but I'm not alone I see ;) ) of the Richard Ivey School of Business (Canada) gives some reasons for the so-called value premium. The value premium for those not familiar is the statistically significant mysterious effect of "value" stocks outperforming "growth" stocks over the long run. Do you know why value strategies beat growth strategies in the long run? It is because human and institutional behaviour cause biases in stock prices that give rise to what is known as the value premium, namely that value stocks beat growth stocks... Individuals are subject to irrational behaviour. They extrapolate, they are overly optimistic, they overreact and most importantly they herd. They herd to protect their jobs – no one has lost his job from an average performance or being in the same group as their peers. If the group loses and you are in the losin...

UPDATE (bottom): Added an additional comment from Bloomberg about possible strategies being considered. It's too early to say anything but CNBC is reporting that 8 banks are working on some plan for the bond insurer problems: Some of the world's biggest banks have grouped together to help work out a bailout plan for troubled bond insurer Ambac Financial Group, CNBC has learned. This potential deal is likely the reason why Standard & Poor's affirmed Ambac's AAA credit rating late Thursday, while putting MBIA on a negative credit watch. That move shocked traders because Ambac had been considered to be the much weaker of the two bond insurers. Also, MBIA had received a capital infusion from Warburg Pincus. CNBC says that the 8 banks working on some deal are the Royal Bank of Scotland, Wachovia, Barclays, UBS, Societe Generale, BNP Paribas, Dresdner, and Citigroup. Greenhill & Co is the investment bank providing advice. It`s not clear what the proposal entails or w...

The BCE merger situation is quite attractive right now. You are looking at around 17% return by the end of the 2nd quarter (I'm primarily looking at the Canadian stock price; US$ returns will differ based on currency fluctuations). The downside risk has been significantly reduced. Andrew Willis of The Globe & Mail points out that the stock market is pricing in zero chance of the closure of the deal: BCE shares touched lows of $33.30 yesterday. At that price, the company is changing hands at a price that reflects fundamentals, not the $42.75-a-share that the Teachers' consortium promised in July. It is now possible to play the world's biggest pending takeover with next to no downside. There is still some downside risk since the stock ran up before the merger announcement. I would say the downside is around 5% while the upside is 17%. Analysts figure that based on projected earnings, plus the $3.2-billion of cash coming from the Telesat sale, plus a scheduled dividend, ...

It's really not funny when one is losing tens of thousands of dollars in an investment, but following the whole monoline industry crisis may end up being the most bizarre experience of my investing career. The latest bizarre act involves MBIA and Bill Ackman, who is trying to develop an "open source" methodology to evaluate how bad the losses will be. Not only are people to analyze the claims but they are to participate in developing better methods to determine how badly off the monolines are. He sent a letter to the insurance regulators and to the SEC (I read it was also sent to Ben Bernanke but not sure). I have no problem with shorts (they improve efficiency and allows the market to price assets better) but it's surprising that the media has given so much airtime to Pershing Square. To make matters worse (in my eyes), MBIA isn't doing anyone any favour by holding a limited conference call , where questions are to be submitted in advance. Instead of asking que...