Thursday, January 1, 2009

A strategy for the new year!

Learn from Warren Buffett's dirty little secret …. He calls them "workouts."

You probably wouldn't expect the world's most successful value investor to come up with such a pretty euphemism for his forays into the world of distressed debt.

In his hedge fund years, from the mid-fifties into the late sixties, over half of Buffett's profits came from what he called ‘workouts.' These were special deals, mergers, and spin-offs that often involved trading large quantities of distressed debt. And in the decades that followed Buffett continued to trade in distressed debt, sometimes through "Private Investment in Public Equity" (PIPE) vehicles or arbitrage strategies.

Indeed, a good portion of Berkshire Hathaway's riches and Buffett's fortune has come from the distressed debt arena.

Most value investors would scoff at the idea of investing in distressed debt. But the Oracle of Omaha has a life lesson for these guys...

Warren was acting in accordance with one of the first rules of value when there's blood in the streets.

And my friends, there's a tidal wave of blood on Wall Street right now. Especially in the fixed-income arena. Don't be surprised to see the Oracle making more of these subtle deals on distressed debt as the credit situation calms down in 2009.

Most investors have been taken over by panic. And now they're running for the hills. De-leveraging their own bets, minimizing their exposure and running for the safety of dollars and T-Bills. But in their uniform insanity, they're fleeing to ‘safety'...and not value.

Despite the credit-binge that’s lead to the current crisis, and atmosphere of craziness that’s permeating the investment world at the moment...take a page from the Oracle from Omaha and give some thought to the opportunities in distressed debt. END