Simple Arithmetic

Andrew Redleaf founded Whitebox Advisors in the late 1990s after a career at Deephaven and trading options at the CBOE.  In addition to managing private and public funds, the team at Whitebox maintains a great website called Whitebox Selected Research that highlights great pieces of investment literature.

Andy also writes the Whitebox Advisor, and we have included an excerpt and link to a full download below. (You can also pick up his book Panic: The Betrayal of Capitalism by Wall Street and Washington on Amazon.)

From the paper:



“It is a first principle at Whitebox to be “security agnostic”: to penetrate the labels like “bond” and “stock” and “hybrid” and assess the real status of a security by the risks and rewards that !ow from the combination of economic circumstances and the details of capital structure. For most of the last decade it was quite clear to us that equities bore all their traditional risk but offered only bond-like rewards (at best), while high yield bonds often offered equity-like returns that could be shielded from default risk by shorting the all too risky stock of the same or a similar firm”




“The other day I was chatting with Jamie Lyngstad, who serves on our equity team, about an equity screen we’ve been running. We’ve been looking for stocks with PE less than 15, free cash !ow greater than earnings, and paying at least 5% of market cap to a combination of dividends and buybacks—with buybacks getting a healthy share of that. At one point Jamie looked at me and said, “You know this is really a bond screen.”

And of course he was right. The three things one wants from a bond are security of principal, reliable coupons/strong interest rate coverage, and high yield. Taking these in reverse order in our screen the yield speaks for itself. For reliable coupons essentially one wants a healthy business; cash !ow exceeding earnings is a reasonable proxy for that. But what about security of principal, the greatest attraction of a true bond, the very reason it’s called a “bond”? Here’s a simple principle about principal: principal is secured by price. Assuming healthy business, the lower the PE the more secure the principal and the more bond-like the stock.”

Download the PDF here:

The Arithmetic of Equities

archives here:


The purpose of Whitebox Selected Research is to bring greater attention to thought-provoking and useful contributions to the investment literature. By this we mean pieces likely to inspire investors to insights that might actually improve their allocation of capital, raise their returns, and even, at the risk of vainglory, make America an even greater and more prosperous nation than it is today.

This may seem an ambitious agenda for yet another research portal, but we hope to be both more and less than a portal in the usual sense.

As with every other area of life the Internet has enabled a flood of financial research and writing published at little or no cost and available everywhere forever. Information overload is a real problem; the usual sort of portal was invented to solve that problem.

We have no interest in solving it. We are not going to try to keep up. We are not going to try to keep you abreast, even briefly, of every development, or even most developments. We have no interest in the impossible and contradictory task of being simultaneously comprehensive and economical.

Rather than solve the problem of information overload we would like to offer information opportunities, opportunities for our readers to be inspired to improve their own work. We will feature pieces not because we feel obliged to note their existence but because they interested us, sparked something like an idea in us, and we hope they will do the same for you.

We do hope that when we miss thought-provoking pieces our readers will alert us to them. But above all we hope never to waste your time and that every time you visit you will encounter some work both engaging and fruitful.