rumours Du Jour – Brought To You By Warren Buffett — The Oracle was on CNBC yesterday morning reviewing his annual letter to investors that was released earlier this week.  The focal point of this letter was potential acquisition targets which hit home for me, becasue as many of our viewers know I like to keep myself up to date on the lastest news in M&A.  Buffett had a robust list of 45 names (listed below) which the headline names were ADM, EXC, and GD.  Buffett describes the companies he is most interested in are large industrial names with solid growth and near monopolies in their business.

 Either way I think the question is who publishes a list a 45 names and what’s the best way to play it?  This morning I bought a couple of the headline names but I knew it wasn’t the best strategy so I took a look at my initial thought, which was why not buy the basket.  The thought was simple, Buffett is going after enormous defensive names with solid growth, names that aren’t volatile and hold up in a down market.  

So, if you bought all 45 names with an equal weighting using an market on open order (the order is placed premarket and is filled at the opening price) and then short the equal dollar amount in futures at the 9:30 open and held all names till the end of the day you would have returned 32 basis points.

That return assumes that you were not hedged, in my case I would have shorted an equal dollar amount of futures to hedge out market risk.  I want to hedge out market risk because the bet I’m making is not will the names Buffett spoke about this morning go up, but, will the names Buffett spoke about this morning outperform the S&P 500, will these 45 names have greater demand than the 500 names in the SPX.  

Today the SPX closed up 16 basis points underperforming Buffett’s 45 and putting our daily return at 16 basis points, right in line with the market.   Check out the spreadsheet below to see the breakdown of every name and how they performed today:

Click Here to get spreadsheet and full article.

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