Trade like Warren Buffett (Wiley Trading Series)


Warren Buffett has had one of the longest and most successful investment careers of all time. While he's considered the "world's greatest value investor," there's another side to Buffett that is not very well known. Although Buffett has gained recognition for his value investing approach to the markets, the fact is that nobody—over the past fifty years—has traded and invested with a more diverse group of strategies than Buffett.

Given the fact that Buffett's investment career ...

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Warren Buffett has had one of the longest and most successful investment careers of all time. While he's considered the "world's greatest value investor," there's another side to Buffett that is not very well known. Although Buffett has gained recognition for his value investing approach to the markets, the fact is that nobody—over the past fifty years—has traded and invested with a more diverse group of strategies than Buffett.

Given the fact that Buffett's investment career has spanned five decades and multiple styles and disciplines, is it possible to Trade Like Warren Buffett? It's impossible to trade exactly like Warren Buffett, but with author James Altucher as your guide, you'll come close.

Trade Like Warren Buffett challenges the current coverage of this great investor by including details of all of Buffett's investing and trading methods, including mean reversion, commodities, bonds, arbitrage, market timing, funds, as well as Graham-Dodd. In addition to the value investing approach, this book discusses other, lesser-known trading strategies and techniques that have helped to make Buffett the greatest investor in history. To augment the discussion of each strategy, Trade Like Warren Buffett also includes interviews with leading financial professionals, who reveal in detail how they've successfully used the same techniques.

Altucher skillfully details Buffett's career and uncovers the paths that led to his success. You'll have a front row seat to the best that Buffett has to offer, including:

  • The Early Years: Buffett's hedge fund years, when he built his fortune from essentially nothing to about $25 million
  • The Middle Years: During the '70s and '80s, Buffett made the full transition from successful hedge fund manager to operator, asset allocator, and insurance company magnate
  • The Later Years: During the '90s and '00s, there was a flight to safety from the dot-com bubble as well as a diversification into bonds, silver, fixed-income arbitrage, and ultimately, foreign currencies

There is no one way to sum up Warren Buffett's investment style. But if you're interested in boosting the performance of your portfolio, taking a page from Warren Buffett is the best way to start.

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Product Details

  • ISBN-13: 9780471655848
  • Publisher: Wiley
  • Publication date: 2/28/2005
  • Series: Wiley Trading Series, #222
  • Edition number: 1
  • Pages: 246
  • Sales rank: 943,857
  • Product dimensions: 6.06 (w) x 9.32 (h) x 0.93 (d)

Meet the Author

James Altucher is a partner at hedge fund firm Formula Capital. He writes for and the Financial Times and has been a periodic guest on CNBC's Kudlow & Cramer. Previously, he was a partner with technology venture capital firm 212 Ventures and was CEO and founder of Vaultus, a wireless and software company. He holds a BA in computer science from Cornell and attended graduate school in computer science at Carnegie Mellon University. Altucher is the author of Trade Like a Hedge Fund, also published by Wiley.

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Read an Excerpt

Trade Like Warren Buffett

By James Altucher

John Wiley & Sons

ISBN: 0-471-65584-8

Chapter One

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 themare 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. 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.

Buffett would spend hours going through Moody's reports on each stock, sifting for the gold among the dirt. And, after spending hundreds of hours doing that (an activity that might now take one hour, tops), he would have to then figure out how to actually buy the shares he wanted. For instance, when Buffett was trying to buy shares of Dempster Mining he had to drive to the town where they were based and convince locals to sell their shares to him. There was no liquid market out there like there is now. So when he bought the shares, he had to hold them for longer then he might have wanted to.

So, value investing the way Buffett and Graham practiced it no longer exists today. There are thousands of mutual funds and hedge funds competing for those arbitrage opportunities, not to mention retail investors with access to the Internet.

During Buffett's hedge fund years (between 1957 and 1969) there were some years in which more than half his profits came from what he called "workouts"-special situations, merger arbitrage opportunities, spin-offs, distressed debt opportunities, and so on. Playing with semantics, we can argue that all of those opportunities represented "value"-that is, buying something that is cheaper than what it was worth-whether it was a spread between two securities, a distressed bond, or a stub stock that everyone ignored. However, these situations are not usually described as value investing.

Instead, over the past two decades we have seen Buffett dip his investing prowess into commodities (his foray into silver in 1997), fixed income arbitrage, many instances of distressed debt through the use of private investment in public equity (PIPE) vehicles, merger arbitrage, relative value arbitrage, and so on. In addition, Buffett has made his first forays into technology investing, owning over the past few years a number of shares in telecommunications services company Level Three and the debt of e-commerce company Amazon; the latter is a company that had never produced a dime of earnings when Buffett first invested in it, let alone an easy means by which someone could compute future cash flows.

There are three stages to Buffett's investment career, and we will focus on techniques used inside each of those phases.


Buffett's hedge fund years were when he built his fortune from essentially nothing to about $25 million at the time he was interviewed by Adam Smith for his 1971 classic, SuperMoney. During this time Buffett had three techniques:

1. The cigar butt technique, into which category Berkshire Hathaway (in its original form) fell. This meant buying stocks that were selling for less than tangible assets. Buffett would sometimes accumulate enough shares that eventually a change of control would occur, giving him direct power over how the assets of the company would be disposed. 2. Value investing, but combined with some of his partner Charlie Munger's ideas on growth and the potential of brands. This resulted in Buffett's American Express play, among others. 3. Special arbitrage situations, workouts, distressed debt, merger arbitrage, spin-offs, and so on.


The 1970s and 1980s were the decades when Buffett made the full transition from successful hedge fund manager to operator, asset allocator, and insurance company magnate. Why the insurance business? And why did he leave the hedge fund business? We know now in retrospect that he was a very good market timer, although prone to being early, just as Bernard Baruch said, "I always sold too soon." So it could be argued that Buffett's departure from the hedge fund business right before an essentially flat decade was a sign of good market timing. However, I don't believe this.

I believe that Buffett did anticipate a potentially horrendous decade for stock market returns, and in fact, 1973-74 was the worst downturn since the 1930s. But I don't think that Buffett would have stopped his hedge fund for fear of poor market returns. Rather, he was always more enthusiastic in his annual letters to his partnership investors when the market was doing its poorest. He prided himself more on outperformance than absolute performance. A return of 20 percent in a year when the market was up 30 percent would have been a disaster for him. Far better would be to return five percent, with the market returning -20 percent for the year. So the fact that the market was about to make a strong downturn would not have been the impetus to cause him to wind down his hedge fund and go into the insurance business.

Rather, I think he saw an opportunity unlike any he had encountered in the past and he wanted to pounce on it. The way Buffett's partnership was structured, he took a 0 percent management fee and 25 percent of all profits. As an example, if his fund had $5 million in it and he returned 20 percent, or $1 million, for his investors, then he would take 25 percent of that, or $250,000 of that, as his fee.

However, an insurance company is much more attractive to a master asset allocator like Buffett. An insurance company works like a hedge fund except Buffett gets to keep 100 percent of the profits. People "invest" their money when they pay their premiums and only get to take their money out again upon illness or disaster. In a well-run insurance business the "cost of float" is ideally zero; that is, you spend no more in payouts than you take in premium. In this way, all profits go to the owners of the business. If the cost of float is zero, then the economics of the insurance business are much better than the economics of a hedge fund.

Rather than retire to a lifetime of bridge playing, Buffett ended up buying for $40/share most of the Berkshire Hathaway shares that he had originally bought for his investors (profitably for them at prices ranging from $7 to $16 per share). Then, while Buffett used Berkshire as his base, the rest of the 1970s became a rollup of insurance companies, regional banks, and other cash-producing assets ranging from the Nebraska Furniture Mart to See's Candies.

It was during this period that he became less focused on his workout plays and more focused on his "control" plays like the insurance companies, furniture companies, and chocolate companies he was buying and his "generals"-the big value plays like Coco-Cola and Gillette that ultimately created billions of dollars in investment profits for Berkshire.

There is no one way to sum up Buffett's investment style during this period. Early on, he was certainly interested in buying companies for less than their book value. The Washington Post is a great example, where he began accumulating shares at a fraction of their liquidation value. Later on, however, particularly in the 1980s, his methods were much less quantitative and bordered on highly subjective. A case in point is Coca-Cola, which Buffett began accumulating in 1988; he ultimately became the largest shareholder. Coke was trading at 13 times earnings, hardly a discount to the market at that time, which was trading around 10 times forward earnings. That said, Buffett was convinced, and he was right, that Coke was trading at a huge discount based on the future earnings of the company.

"The Middle Years" are perhaps the least interesting period for me. However, this period (the 1970s and 1980s) is the subject of countless books on Buffett. Hagstrom's book The Warren Buffett Way set the tone and documents Buffett's stock picks during this period.

I repeat the following refrain throughout the book: It is not possible to trade exactly like Warren Buffett. The goal is to use whatever means possible to approximate his trading by attempting to quantify the term "margin of safety".


The 1990s and then the 2000s created an interesting dilemma for Buffett, one that no other company has ever faced. He simply had too much cash to put to work. As much as he loved finding quality companies and stocks, the world was just too small for him at this point. In lectures that he occasionally gave to college students he would often sentimentally reflect that if he had less money he could still return 50 percent a year in arbitrage situations. But with $50 billion to put to work this was just impossible. Nor is it easy to go through the market and find the slim pickings. Let's say a $1 billion company is trading at a cheap price and Buffett is able to buy 10 percent of it. Assume that it then goes up 100 percent for him over the next year-a truly remarkable return. It would still only increase the book value of Berkshire Hathaway by 0.2 percent.

Instead, the 1990s saw several trends developing in Buffett's style. First there was a flight to safety. In the late nineties, when the world was haphazardly buying everything with dot-com written all over it (author disclosure: I was, too), Buffett was diversifying into bonds, into silver, fixed income arbitrage, and ultimately foreign currencies.

So given the fact that Buffett's investment career has spanned five decades and multiple styles and disciplines, is it possible to "trade like Warren Buffett"?


It is not possible to trade exactly like Warren Buffett. The best we can do is approximate his approach, plead in each trading situation for the margin of safety that Buffett always demands, and try to develop our own approaches that are, if not exact replicas, at least Buffett-like. But why can't we trade like him? To summarize the three main reasons:

1. The Internet has changed everything. Every SEC filing, every news report, every inside transaction, and every earnings release is instantly posted to the Internet and available to the tens of thousands of investors who are looking for low price to book, high return on equity companies. Although many studies have come to the conclusion that too many retail investors are naive, the reality is that there are many good investors out there who know how to make use of the information at their fingertips. No longer does an investor have to dig through tattered old filings to find the next Dempster Mining and then drive around Nebraska to find random shares in it. 2. Arbitrage spreads have narrowed. The "workout" trades that Buffett mastered in his hedge fund days are no longer as easy to accomplish as they once were. When Buffett started out, only a handful of hedge funds existed that were attempting to use those techniques. Now there are over 7,000 hedge funds trying to squeeze the blood out of every arbitrage situation. While the opportunities still exist-opportunities that we will examine in depth in later chapters-they are of a much different breed then what Buffett first encountered. (Continues...)

Excerpted from Trade Like Warren Buffett by James Altucher Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of 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.


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