Trade Like Warren Buffett
By James Altucher

Contents

Chapter 1 Does Warren Buffett Trade?
Chapter 2 Graham-Dodd and a Dose of Fisher
Chapter 3 Equities
Chapter 4 Current Holdings
Chapter 5 Merger Arbitrage Like Warren Buffett
Chapter 6 Relative Value Arbitrage
Chapter 7 PIPEs and High Yield
Chapter 8 Junk
Chapter 9 Warren Buffett’s Personal Holdings
Chapter 10 Closed-End Fund Arbitrage
Chapter 11 Interviews with Two Buffett-Style
Hedge Fund Managers
Chapter 12 P/E Ratios, Market Timing,
and the Fed Model
Chapter 13 Buffett and Disasters
Chapter 14 Life and Death
Chapter 15 Fixed-Income Arbitrage
Chapter 16 Trade Like Bill Gates
Chapter 17 Jealousy
Index

Sample Pages

Chapter 1 Does Warren Buffett Trade?

My favorite holding period is forever. - Warren Buffett

First, I have to apologize in advance. This book barely mentions Coca-Cola or the Washington Post. I also don't really talk about the many fine companies that Berkshire Hathaway has bought over the past three decades (See's Candies, the Pampered Chef, Dairy Queen, National Furniture Mart, and others). There are many excellent books that cover these topics. And while Warren Buffett has made billions of dollars from these investments, I don't think I can add to the already great dialogue that has taken place on these topics.

Nor is this book really about value investing. There are many definitions of value investing and many treatises on value versus growth. But even Buffett has stated that on the whole, the distinctions between value and growth are nonsense. This book is about the various ways that Buffett has applied the concept of "margin of safety" outside of his buy-and-hold strategies. He has had a longer and more diverse investment career than just about anybody. There are several people in the world (fewer than ten, actually) who have had more years' experience than Buffett at picking stocks, but I can think of no one who has traded and invested with a more diverse group of strategies over the past fifty years. It is these strategies that I write about. Many of them are normally thought of as "trading" strategies instead of the buy-and-hold investing for which Buffett is famous.

When I went to the Berkshire Hathaway annual meeting in 2003 I had no idea what I would encounter. I met one man who bought 200 shares of Berkshire Hathaway in 1976 for $15,000, give or take. He sold half of those shares a year later for a solid double (who can blame him?) and today the remaining shares are worth over $9,000,000. He now hangs out skiing in Tahoe for most of the year.

I asked him why he had bought those shares and he said that he had heard of Warren Buffett while growing up in the same town as him, had heard he was smart, and liked the insurance industry. One can argue that this man I had spoken to was an incredible investor. He had turned $15,000 into $9,000,000 over the course of 25 years—a 50,000 percent return!

Not everyone at the meeting was as lucky. Most of the people at the meeting were fairly recent owners of their shares and were either mildly up on their investment or flat. At the time of this writing Berkshire Hathaway is close to making an all-time high, so hopefully most of these people have held onto their shares. Throughout the meeting I asked people why they were there. After all, it was the most popular annual meeting in the company’s history, with approximately 15,000 people in attendance. Some people were there because they just wanted to see Warren Buffett. What zeitgeist had he been tuned into all his life that he could start with $100 and compound it into $40 billion? While at the same time maintaining his homespun humility and simple lifestyle (he still lives in the same house he bought 40 years ago for $30,000).

Buffett supposedly found these incredible deals through the principles of value investing. Again, there are many good books out there about value investing that try to explain Buffett’s value approach.1 At the end of this book I try to provide a comprehensive suggested reading list of the major books written about Buffett.

However, Buffett achieved much of his early success from arbitrage techniques, short-term trading, liquidations, and so on rather than using the techniques that he became famous for with stocks like Coca-Cola or Capital Cities. In the latter stages of his career he was able to successfully diversify his portfolio using fixed income arbitrage, currencies, commodities, and other techniques. And further, in his personal portfolio he tended to stick to the style of deep value investing that marked his early hedge fund years.

This book is titled Trade Like Warren Buffett, and the phrase alone brings up several contradictions in the traditional mythos about Buffett.

First, Warren Buffett supposedly does not trade. He finds an undervalued gem, then buys and holds onto it forever. After all, it takes a million years to turn a piece of coal into a diamond, and a good company should always bare that in mind. For example, Buffett bought Gillette in the 1980s and, to his credit, many multiples later, he still holds onto it. After all, people will always shave, so the demographic for Gillette is approximately 3,000,000,000 citizens of this planet. How can you go wrong holding this stock forever?

Exhibit 1.1 represents the holding period of some of the Berkshire Hathaway trades that Buffett held for less than five years.

Second, the world of trading usually evokes images of day traders, fingers on the trigger, ready to scalp stocks for a few ticks several dozen times a day. Seldom do people think of Warren Buffett, known for holding onto stocks for years, when the subject of day trading comes up.

However, the texture of value investing now is very different than when Warren Buffett was making his early profits, let alone when Benjamin Graham and David Dodd wrote their classic text Security Analysis. Back then, there was only a limited set of eyes that had the access to information, not to mention the desire, to locate companies that fit a certain deep value criterion. But today if I want to sift through six thousand stocks to find some that fit specific earnings, ROE (Return on Equity), P/E (price over earnings ratio), and other criteria, then I can easily do so with any number of stock screeners online. And, believe me, countless value investors are doing just that. The information arbitrage that existed in the 1960s and earlier is nearly nonexistent today.

Note: The rest of this chapter is omitted