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  • Writer's pictureIshfaaq Peerally

Arbitrage Investing

I've been doing arbitrage for a couple of years now saying that this is a better alternative than holding cash. I became interested with arbitrage by reading the old letters of Warren Buffett $BRK.B when he was managing the Buffett Partnership.

What is arbitrage? Arbitrage happens whenever there is a spread in the price of a security. For example, if a stock is being sold in London at $100 and in New York at $102. You can buy the shares in London and sell in New York for a $2 profit. This is a risk-free trade.

The type of arbitrage I normally do is called Risk Arbitrage or Merger Arbitrage. For example, if a company is being bought by another one at $100 a share. If today, the stock price is $80, you can buy, wait for the deal to go through to make money by arbitrage. But you always have the risk that the deal will fail as it happened with DouYu $DOYU . That's why you always need to have a plan of what you will do if the deal fails. This is what I did with Genworth Financial $GNW . Besides, always invest in fundamentals and within your circle of competence.

Arbitrage can be an alternative to cash as stocks undergoing mergers are usually less volatile with low correlation with the market $SPX500 .

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