Geez, kid. Put a shirt on.
So I’m kinda a gym guy now, even though they (we?) are collectively the worst group of people on the planet. I get pissed off when there are too many people hogging my equipment. I now have my own locker, which is just the same empty one I use every time I show up. And I’ve even begun to acknowledge some of the regulars with knowing nods.
I hate what I’ve become.
I don’t really have much interest in lifting weights, so I’m usually on the cardio machines or in the field house playing some kind of sport. The elliptical has become my workout of choice. They have TVs too, which is a nice touch. It’s nice to be distracted while you work out.
But after a little while, TV wasn’t really doing it for me anymore. The nice thing about watching sports (my program of choice, always) is you don’t really need to hear what the commentators are saying. It’s easy to follow the play. So I stopped listening to the TV and started listening to podcasts instead.
I quickly abandoned podcasts too, for a few reasons. I couldn’t really find ones that were very interesting. The length varied too much. And I found I’d kill 10 minutes looking for something interesting before I’d even start to workout. Nuts to that.
So I switched to audio books. And let me tell you guys, it’s been amazing.
Regular readers already know I’ve made this change. I talked about listening to a book about the Bush family, and what it taught me about networking. It was a valuable lesson, especially for a guy like me whose networking strategy can usually be summed up with “leave me alone.” I’ve spent more time trying to interact with people since, with decent results.
The book on the Bush family was about the fourth one I “read” while huffing and puffing away. Let me tell you about the first one, and how it managed to make me enough money to pay for my gym membership for the year…and then some.
The book is Warren Buffett and the Art of Stock Arbitrage by Mary Buffett, who leveraged her 12 year marriage to Warren’s son Peter into a mini-empire of writing books about her former father-in-law’s investing methods. Ms. Buffett name drops her former father-in-law’s name approximately every second sentence in the book, which probably has to be a little annoying for ol’ Warren. But hey, good for her.
The arbitrage book is a good primer on the basics of the practice. Basically, arbitrage is the act of buying something knowing there’s a very high chance you can sell it for slightly more money at a later time.
The most common way to do this is through merger arbitrage. Say Company A decides to acquire company B for $20 per share in cash. Company B is okay with this, Company A has the cash, and everything is good.
And yet, company B’s shares won’t immediately trade at $20 per share. They’ll end up anywhere from the $17 to $19.50 level, depending on a few factors, including how secure the market views the transaction, the time in between the announcement and the closing date, and any potential regulatory issues.
Say this transaction looks to be rock solid with a closing date of just a few months out, so it trades at $19.50 per share. That small almost guaranteed profit is the arbitrage situation. It might not be the sexiest return in the world, but it can turn out pretty lucrative.
Say we have two months until the deal closes. A 2.5% return isn’t much to get excited about if it takes a year to earn it, but over two months it works out to a 15% annual return. Now we’re talking.
Both Mary and Warren Buffett stress one thing about merger arbitrage. You have to invest in deals that look extremely likely to succeed. I made that mistake in the past when I wrote about BlackBerry’s merger arbitrage, but luckily I didn’t invest anything in it.
(I still hold BlackBerry shares, and I’m still losing money on them. If y’all need me, I’ll be shaking my fist and swearing at anyone who has one of their phones. Since that’s nobody, you won’t have to worry about me swearing in public. More than usual, anyway.)
Back in May, MTY Food Group announced it signed an agreement to agree to acquire Kahala Brands Ltd., a deal which had everything merger arbitragers are looking for. Insiders owned 93% of Kahala shares, meaning it was pretty obvious management was all for this. MTY’s shares popped more than 25% on the news, indicating the market was pretty happy with the deal. In short, everybody was happy, and when everybody is happy good things happen.
For a short time after the deal was announced, shares traded at between $130 and $140 each, even though the price agreed to was closer to $150 per share. So I picked up a small position at the higher end of that range and held it for approximately a month, making a cool $10 per share for holding just over 30 days. Annually, the return worked out to 80%, less taxes and trading costs.
The amount of profit made on that one trade was enough to pay for my gym membership for a whole year, plus some spending money. Not bad for some skills I refined while working out. And I got to keep my shirt on the entire time.
Let’s wrap it up
In 2016, I really hate how people claim they can’t learn things. Not having the time is the most common excuse, yet these people still seem to find time to watch three hours of TV a night.
If you make learning a priority, it’s not that hard to do. Replace TV with reading, or taking one of the million free courses out there, Hell, even cruising educational subreddits instead of the newest from r/adviceanimals can expand your knowledge, although I’d stick to books, myself.
My merger arbitrage profit will likely be the first of many. I learned and got slightly less fat at the same time. Finally, multi-tasking works.