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Takeover Investing: Profit From This Proven Warren Buffett Strategy
by Dr. Scott Brown, Advisory Panelist
Tuesday, October 6, 2009: Issue #1109
In 1964, Donald and Mildred Othmer placed $25,000 in the hands of a young Columbia University MBA graduate. In 1974, the graduate returned to offer them the choice of having their money back, or buying shares in his new company.
The Othmers picked the shares. It was a fantastic decision.
In 1998, the city of New York was stunned when this apparently modest couple died, leaving an estate worth over $700 million. That’s the power of 20%-plus average compounding for 34 years!
And it came courtesy of their young Columbia graduate – none other than Warren Buffett, widely known as the world’s best value investor.
But that’s not the only strategy that Buffett uses to grow his wealth. There’s another excellent trading method that has produced some stellar gains. And you can use it, too. Called “risk arbitrage,” it’s a takeover investing strategy. Here’s how it works…
From Warren Buffett to Benjamin Graham… Cash in on Corporate Takeovers
Even if “risk arbitrage” sounds a little vague, the premise is really quite straightforward. In this case, you simply track “credible rumors” of corporate takeover announcements before the fact, buy shares of the target companies and wait for the news to hit the mainstream wires.
Studies from the late 1990s verified that simply buying credible rumors before a takeover is announced to the press churned out an average 16% return – even when the announcements never came.
And if the announcements do come, the statistics are startling…
On announcement day, the shares of takeover targets jump by an average of 38% in just hours.
Hence, many amateur takeover traders buy into too many rumors – as many as fifty a year or more, thus spreading their capital too thin. There are better ways to do it…
Post-Announcement Profit-Taking
The simplest strategy is to wait for the actual announcement and buy in after the fact.
Buffett learned this alternative strategy from his mentor Benjamin Graham – one that he told his shareholders had generated well over 20% per year in unleveraged returns between 1926 and 1988. In fact, it racked up 53% for Buffett in 1988 alone.
So Warren Buffett has made a killing by only participating after the actual takeover has been publicly announced. What Buffett has shown is that you don’t have to buy into rumors of a takeover to make a huge profit.
For instance, on Thursday, September 10, Louis Basenese tipped off his Takeover Trader readers about an actual announcement that Kraft Foods (NYSE: KFT) had bid $16.7 million for Cadbury plc. (NYSE: CBY) the Monday prior. That day, Cadbury shares had jumped from $37.49 to $51.77.
That’s a 38% jump in one day.
Many investors wished they’d bought Cadbury before the masses heard the announcement in order to bag maximum gains. They’re still sitting on the sidelines unaware of the after-the-fact profits that Buffett seeks. And this is just one of many takeover announcements on Wall Street all the time.
Let me emphasize that risk arbitrage is really looking at Wall Street as a very profitable Peyton Place…
Hitch a Ride on Wall Street’s Takeover Wagon
Corporate merger and acquisition divisions spend millions researching profitable takeover targets.
And at the moment, there’s an enormous amount of money sitting on the sidelines. In fact…
- Private equity funds alone have at least $1 trillion in ammunition.
- Corporate America holds a wad of $700 billion looking for a new home.
And because everybody on Wall Street knows who’s looking at whom, this creates “credible rumors” of takeovers. So another route to notching up stellar returns without even glancing at a company’s income statement or balance sheet is to put your ear to the rumor mill and buy in before an offer is tendered.
When a company announces a takeover offer, it’s saying that its top financial analysts have looked at every aspect of the deal and given it a green light. This puts the millions of takeover research dollars spent annually by corporate America in your hands.
The question is: How do you keep track of them and separate the “credible rumors” from the false dawns? And how do you know what shares to buy and when to buy them before (or after) the fact?
How do you keep from getting burned as an amateur?
Your Personal Takeover Trader
Louis Basenese can help you succeed in either risk arbitrage strategy before (or after) the fact. His Takeover Trader service sniffs out valid takeover rumors (and reports announcements after the fact) all the time, handing investors some super gains in the process. For example…
- A 51% profit locked in on the first half of an E*Trade Financial (Nasdaq: ETFC) position (currently up 45% on the second half).
- Profits of 175% and 116% on the first and second half of Saks (NYSE: SKS) call options respectively.
- A current 55% winner on Trident Microsystems Inc. (Nasdaq: TRID) – a company that Louis himself has profiled twice recently – in his “low density” stocks column and in a recent M&A article.
For more information, check out this report.
It all starts with education,
Dr. Scott Brown
Investment U News Update: Did you miss out on the Kraft-Cadbury takeover news? Although Cadbury rejected Kraft’s offer, labeling the firm a “low growth conglomerate” and a takeover as an “unappealing prospect,” Cadbury shares still soared on rumors that it could trigger a bidding war. The U.K. Takeover Panel has told Kraft to submit a bid by November 9, or risk being blocked for six months. Analysts have also touted a joint Nestle-Hershey bid.
So now, Cadbury investors could take the “Buffett approach” of buying while the boardrooms haggle over the final price, thus profiting as the stock drifts higher. If another bidder enters the fray, the price goes up further. Buffett knows his sell price will often be higher than the price when the takeover was announced ($51.77 in this case) — generally 20% or more!
Even if you buy Cadbury at $50.65 today, you can expect the stock to rise to $60.78 or higher if a deal goes through.
- Behold, The Power Of Cheese… And Chocolate
- Let Hype Take A Bite Out Of Apple Shares Before You Buy
- Is Warren Buffett Signaling a Housing Recovery?
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Dr. Brown specializes in teaching stock investing because as he emphasizes "the stock market is where individuals and families have the best shot at succeeding financially!"
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October 8th, 2009 at 5:22 am
Super post, Need to mark it on Digg
Jinny
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