This is part 3 of the series on the “4 Market Strategies”.
You can read the previous post here:
This 3rd part, we will be talking about …
“#3: Short Term Arbitrage
Keep your eyes wide open and pull out your calculator when there are announcements of acquisitions because very likely, there will be chance for short-term arbitrage. The term Arbitrage in this strategy means we are buying a stock at a lower price and selling it at a higher price in the near future. Simply put we are buying low, selling high but the key thing is the higher price and the future date has already been fixed, so our profit is pretty much secured.
This can happen when a company is being acquired by another company and the acquiring company has announce the price it is buying the stocks at and the date it is buying the stocks over. So as an investor, if we already know what the stock price is going to be in the future and can actually buy the stock at a lesser price today, we have just gotten ourselves a short term arbitrage deal.
A recent arbitrage executed by myself was when OCBC Bank offered to buy Wing Hang Bank at HKD124 per share. When the news was released, the share price of Wing Hang was trading at HKD108. I bought it then and waited for the price to rise. Sure enough, the share price went up to HKD within 2 months after the deal was concluded. It is a 14% returns in 2 months or an annualized returns of 84%.
Unknown to many people, Warren Buffett himself uses this strategy 59 out of 261 investments from 1980 to 2003 (study done by Professors Gerald Martin and John Puthenpurackal). This is about 22% of his executing strategies. And what is more interesting is that those 59 arbitrage deals produced an annualized returns of 81.28%.
This strategy is suited for people who do not mind being slightly more active in monitoring news and stock market announcements.
This strategy will be more of an active participation for fundamental investors to build up cash.
Do note that the risk involved in this arbitrage opportunity is that the deal may not go through and the acquisition does not happen. If that happens, the stock price will not move as expected. So the important thing is only arbitrage on stocks that are great businesses and which you don’t mind holding anyway. In other words, make sure this stock is either one that fits into strategy 1 or strategy 2 so in event arbitrage does not happen; you are still a happy investor. ”
I will be sharing the 4th strategies in the next post.
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Mind Kinesis Research Team