Review of Buffett's Letters

I often tell people who are just getting started investing to go through Buffett's letters one by one. They provide the careful reader a great education on investing, from the world's best, and they're available for free.

Recently, in Motley Fool, Ravi Nagarajan reviewed a compilation of these essays. And he did a great job. But I'll let you judge for yourself, starting with this excerpt:

One of the interesting aspects of reading Buffett’s letters in chronological order is that one can combine knowledge of the timeframe in which the letter was written and read the document with that context in mind. Not only that, but with benefit of hindsight, it is possible to appreciate Buffett’s statements regarding Berkshire and the business environment in general.

However, while the chronological review is useful for understanding the evolution of Berkshire Hathaway and Buffett’s thinking, it leaves something to be desired in terms of consolidating Buffett’s thoughts on specific subjects. This is where Cunningham’s arrangement comes in.

Cunningham includes an introductory section that provides a great deal of information regarding Buffett’s background and would be useful for those who are new to Berkshire Hathaway. He then arranges Buffett’s letters into seven major themes and then includes excerpts from Buffett’s letters over the years as they relate to each theme. Essentially, this takes shareholder letters intended to be read at a given point in time for a particular audience and transforms it into a well organized book.

By the way, if the name of the author strikes you as familiar, I've talked about his blog here at least once before. You can continue reading the above review at his site, Rational Walk.

The Berkshire Arbitrage--Over

At least for now, the Berkshire arbitrage we posted about back in February is over. We linked to Felix Salmon blogging about it, back then, and we will link to someone else discussing the issue now.

Ravi Nagarajan, at Rational Walk, has an excellent post on the movement in Berkshire A and B stock over the past month. This is a blog to keep an eye on for sure.

An excerpt of his thinking at the start on the arbitrage that's gone au revoir follows:

Based on my research, on February 20, a record high spread developed between Class A and Class B shares. On that day at the close of trading, it was possible to purchase 32.26 B shares for the same price as a single A share. Any A shareholder was free to sell a single A share and purchase 32 B shares plus pocket the change represented by the fractional 0.26 B share.

By doing so, the A shareholder would effectively increase his economic interest in the company by 7.53% (including the retention of the cash equivalent of the fractional share).

Granted, the A shareholder would now only have a fraction of his prior voting rights, but that appears to be the only downside, aside from potential tax implications related to the A sale which could be significant. A long position would be maintained with significant addition to the shareholder’s economic position.

It would also have been possible to make a move that would not bet on the direction of Berkshire’s stock price but only on the eventual narrowing of the historically wide A/B spread. By shorting one A and purchasing 30 Bs, an investor could effectively bet on an eventual closing of the historic spread.

Regardless of the direction in which Berkshire shares trade, the investor could profit when the spread returns to more typical levels. At that time, the A share would be repurchased with the proceeds of selling the 30 B shares. The main risk here would be if the spread widens further and does not narrow again in the future.

For the rest, including a comment on efficient market theory, click here.