by Dr. Scott Brown, Advisory Panelist

In 1964, Donald and Mildred Othmer placed $25,000 in the hands of a young Columbia University MBA graduate. In 1974, the graduate returned to offer them the choice of having their money back, or buying shares in his new company.

The Othmers picked the shares. It was a fantastic decision.

In 1998, the city of New York was stunned when this apparently modest couple died, leaving an estate worth over $700 million. That's the power of 20%-plus average compounding for 34 years!

And it came courtesy of their young Columbia graduate – none other than Warren Buffett, widely known as the world's best value investor.

But that's not the only strategy that Buffett uses to grow his wealth. There's another excellent trading method that has produced some stellar gains. And you can use it, too. Called "risk arbitrage," it's a takeover investing strategy. Here's how it works…

From Warren Buffett to Benjamin Graham… Cash in on Corporate Takeovers

Even if "risk arbitrage" sounds a little vague, the premise is really quite straightforward. In this case, you simply track "credible rumors" of corporate takeover announcements before the fact, buy shares of the target companies and wait for the news to hit the mainstream wires.

Studies from the late 1990s verified that simply buying credible rumors before a takeover is announced to the press churned out an average 16% return – even when the announcements never came.

And if the announcements do come, the statistics are startling…

On announcement day, the shares of takeover targets jump by an average of 38% in just hours.

Hence, many amateur takeover traders buy into too many rumors – as many as fifty a year or more, thus spreading their capital too thin. There are better ways to do it…

Post-Announcement Profit-Taking

The simplest strategy is to wait for the actual announcement and buy in after the fact.

Buffett learned this alternative strategy from his mentor Benjamin Graham – one that he told his shareholders had generated well over 20% per year in unleveraged returns between 1926 and 1988. In fact, it racked up 53% for Buffett in 1988 alone.

So Warren Buffett has made a killing by only participating after the actual takeover has been publicly announced. What Buffett has shown is that you don't have to buy into rumors of a takeover to make a huge profit.