a Twitter thread from @72types

1.

Buffett's BPL results:

- 30% a year

- 28X total return

Even more impressive: No down years

How'd he do it? Arbitrage

Arbitrage investments produced:

- Market-neutral results

- +20% unleveraged returns

Here's a thread on an arbitrage deal from Buffett's PA:

Bayuk Cigars

2.

Buffett invested in Bayuk in March 1982. At the time, the company had two assets:

- $3M EBIT cigar business*

- $15M net cash & investments

They also announced a plan to:

- Sell the cigar business

- Liquidate & dissolve the company

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*Bayuk's brands:

- Garcia + Vega

- Phillies

3.

Why'd Buffett invest?

In early March 1982, Bayuk:

- Sold Garcia + Vega for $10M

- Declared full liquidation by YE1986

- Disclosed $15 per share liquidation NAV

Bayuk's mid-march stock price:

~ $13.50 per share

4.

Don't think paying $13.50 for $15.00 sounds appealing?

Consider that Bayuk also declared the following distributions:

- $8 per share on April 6 (within weeks)

- $4 per share by YE1982

This left Buffett with:

- $1.50 per share basis

VS

- $3.00 per share NAV

5.

Bayuk's NAV also turned out to be conservative. After the sale of the remaining cigar asset (Phillies) in June 1982, Bayuk increased their residual NAV estimate from (a) $3.00 per share to (b) $3.91 per share.

6.

How'd the investment perform?

Bayuk paid over $16 in distributions, including:

- $8.00 (4/6/82)

- $4.00 (6/29/82)

- $1.50 (3/15/83)

- $1.25 (12/15/83)

- $0.50 (12/31/1985)

- $0.84 (4/15/1986)

Buffett's returns?

- 2.7X MOIC (on the $1.50 stub)

- 38% IRR (estimate)

7.

The risks?

In late 1981, Bayuk agreed to sell their cigar assets to American Maize for $14.5M. But a DOJ antitrust suit forced Bayuk to abort the deal. American Maize then sued Bayuk for $6M.

This lawsuit could've:

- Reduced Bayuk's NAV

- Delayed liquidation distributions

8.

Want to learn more about Buffett's arbitrage investments? Check out @wabuffo's thread on BPL's special situations and workouts: https://twitter.com/wabuffo/status/1608097728713879557?s=20&t=gc0wSXAPaoD58VHiTEi5zQ

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Bill (@wabuffo)

I'm re-reading Buffett's Partnership letters.

It's clear he "engineered" his portfolio to generate alpha by using what he called "work-outs". His work-out portfolio handily beat the Dow.

But these results understate performance b/c of:

- use of leverage,

- reporting method.

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