Warren Buffett's Letters
The above letters are free, and a decent place to start. Warren is probably the most successful investor in history, with a 50 year record. His letters are suprisingly readable and do a good job of explaining the philosophy he follows.
From his 1988 letter, one of my favorites.
"In past reports we have told you that our insurance
subsidiaries sometimes engage in arbitrage as an alternative to
holding short-term cash equivalents. We prefer, of course, to
make major long-term commitments, but we often have more cash
than good ideas. At such times, arbitrage sometimes promises
much greater returns than Treasury Bills and, equally important,
cools any temptation we may have to relax our standards for long-
term investments. (Charlie’s sign off after we’ve talked about
an arbitrage commitment is usually: “Okay, at least it will keep
you out of bars.”)
During 1988 we made unusually large profits from arbitrage,
measured both by absolute dollars and rate of return. Our pre-
tax gain was about $78 million on average invested funds of about
$147 million.
This level of activity makes some detailed discussion of
arbitrage and our approach to it appropriate. Once, the word
applied only to the simultaneous purchase and sale of securities
or foreign exchange in two different markets. The goal was to
exploit tiny price differentials that might exist between, say,
Royal Dutch stock trading in guilders in Amsterdam, pounds in
London, and dollars in New York. Some people might call this
scalping; it won’t surprise you that practitioners opted for the
French term, arbitrage.
Since World War I the definition of arbitrage - or “risk
arbitrage,” as it is now sometimes called - has expanded to
include the pursuit of profits from an announced corporate event
such as sale of the company, merger, recapitalization,
reorganization, liquidation, self-tender, etc. In most cases the
arbitrageur expects to profit regardless of the behavior of the
stock market. The major risk he usually faces instead is that
the announced event won’t happen.
Some offbeat opportunities occasionally arise in the
arbitrage field. I participated in one of these when I was 24
and working in New York for Graham-Newman Corp. Rockwood & Co.,
a Brooklyn based chocolate products company of limited
profitability, had adopted LIFO inventory valuation in 1941
when cocoa was selling for 50 cents per pound. In 1954 a
temporary shortage of cocoa caused the price to soar to over
60 cents. Consequently Rockwood wished to unload its valuable
inventory - quickly, before the price dropped. But if the cocoa
had simply been sold off, the company would have owed close to
a 50% tax on the proceeds.
The 1954 Tax Code came to the rescue. It contained an
arcane provision that eliminated the tax otherwise due on LIFO
profits if inventory was distributed to shareholders as part of a
plan reducing the scope of a corporation’s business. Rockwood
decided to terminate one of its businesses, the sale of cocoa
butter, and said 13 million pounds of its cocoa bean inventory
was attributable to that activity. Accordingly, the company
offered to repurchase its stock in exchange for the cocoa beans
it no longer needed, paying 80 pounds of beans for each share.
For several weeks I busily bought shares, sold beans, and
made periodic stops at Schroeder Trust to exchange stock
certificates for warehouse receipts. The profits were good and
my only expense was subway tokens."