What's a WORKOUT STOCK PORTFOLIO


If you're going to read Warren Buffett's partnership letters(1956-1969), you'll see that he divides his portfolio in 3 parts: 1. Generals 2. Controls 3. Workouts The Generals are stocks which he was buying in the open market and it is the same type of investing most of us do today. The controls are companies in which he had a companies in which he had a controlling share in, for example, by being a board member. And the workouts were preferred shares, options, arbitrage deals and other types of short-term trades he was doing. Even today, his portfolio is made up of these 3 segments even though he doesn't really talk about it anymore. His investments in $AAPL $JPM or $GS are generals. His investments in $KHC is a control. Other controls are companies fully owned by $BRK.B for example, BNSF, Duracell and Dairy Queen. And the workouts are $RHT which is an arbitrage trade which he's doing in awaiting the acquisition of the company by $IBM . He is going to buy preferred shares of $OXY upon the acquisition of $APC . He also issued options in 2008 on the $SPX500 some of which will expire in 2038.

For today, let's talk about the workouts. The workouts have been a very important factor in making Warren Buffett make these +50% annual returns in the early years of his career even though today, they are less important since Berkshire Hathaway is already a massive company. It is hard to know exactly what he was buying at the time because he was not giving details and they were not required. I've also studied the strategies of several other investors including Ray Dalio and George Soros and decided to set up my own workout portfolio.

For me,a workout is just a company which, for some reasons, has a very high probability of going to a particular stock price in a given period. For example, in my workout portfolio, there is $CELG . I know that the company will be bought by $BMY for a certain price and currently the stock price is much lower, so if I buy now, with a high certainty, I can make profits from the spread. This is called a merger arbitrage. Another example, is $AGN being acquired by $ABBV . However, I also ad companies which in my opinion are expensive but have favorable environments in front of them. For example, $DGE.L is quire expensive but because of Brexit, this stock can keep growing, $LMT is quire expensive but higher defense spending will make the stock grow more and $CCI and $AMT are going to grow with 5G.

However, workouts should not be mistaken for speculation. I don't use any technical analysis when making these workout trades. I use purely fundamental analysis and some behavioral economics. I've been using these workouts strategy for about 3 weeks and so far, the returns have been satisfactory and they did help me beat the $SPX500 in June. I made a few mistakes and learnt from them. It is too early to access the workouts but I will eventually let you know how much they are actually contributing to my overall gain. Can we make +50% return this year with the same level of risk? It is a possibility but I'm aiming for 35%.

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