I call this The pritzker model and which I extracted from snowball .
When Benjamin agreed to hire in Warren Buffett after his initial hesitation that the jobs were reserved for only Jews that was a changing point in Buffett’s career ! That was a Mastermove that Buffett did not want to refuse and let it pass !
There he learned about arbitrage and used that method throughout his career . There came one such opportunity of Cocoa bean Rockwood & Co was a number 1 chocolate chip maker The price of Cocoa bean was shooting up and the company couldn’t increase its selling price on its chocolate chip which led to a losses and so decided to sell the inventory of cocoa beans it had to gain a windfall profit but couldn’t sell it due to high taxes on it . So they offered a deal to Graham-Newman & co but graham refused the deal to pay as prices were high. so he turned to Investor Pritzker who found that in US TAX CODE 1954 the company needed to pay no tax if the company is reducing the scope of business and pay no tax on partial liquidation of business . pritzker buys enough stock to get control of the company and plans to sell 13 million pounds of Cocoa beans to be sold at 36 $ in exchange for shares to current shareholders at current share price of 34$ to increase the ownership in the company.
Graham cites a opportunity buying Rockwood shares at 34$ and lock in a 2$ profit ( great Odds on his side of the deal ) . So in return to exchanging shares now Pritzker would give the warehouse certificate which contained the number of beans to be given . .But there is a risk ? What if after buying the cocoa if the price of Cocoa beans dropped to 30 $ ( a huge loss ). So graham sold Cocoa futures to lock in the 2$ profit on the trade.
This deal was assigned to warren Buffett who in turn studied the deal objectively and what turned out was more interesting. Now Warren had totally inverted the situation and seen something else. why did it make sense to sell ? When Pritzker is buying something at that price .
So what he found out was interesting dividing the total Cocoa beans in full attributable to the company with total number of shares turned out that the value per share to be greater than 80 pound per share . To the Persons who did not turn up to offer their shares were worth more Cocoa beans per share than offered by pritzker realising this Buffett thinks his slice of shares too would increase by holding on so the side to play is on pritzker and thinking from Pritzkers point of view Buffett loads up 222 shares and doesn’t do the arbitrage
Shares of Rockwood which was selling at 15$ shot upto 84 $ soon after the pritzker offer. A Mastermove that paid off handsomely to buffett instead of the 444 $ that would have been made if he did the arbitrage Buffett ended up making around 13000$ but the Persons who played the arbitrage also made a 2$ profit .
Later Buffett has Coat-tailed pritzker for years and has said he liked his way of thinking . It’s not bad to get ideas from others but it’s bad not to think it through and sift them in your mind .
Ideally as investors always ask
what is there for the other person in this deal ?
Why is the shares being sold to me ? When buying a falling stock .
What does the person on the other side of the trade think ? What do I don’t know ? ( The unknown unknown ) I recommend you Read : Richard Zeckhauser’s paper published – investing in the Unknown and the unknowable
What do I need to see here to change my belief or my view ?
you can question any situation when your are offered something as What’s in it for the other person ?
Pritzker model has helped me in my decision making its a model i use very often on a day to day basis even when i coat-tail I ask these above questions which had made me avoid some worst situations and to gain clarity from my investments . You can check out our other models in my other posts and how practically to apply them to investing.