By Aaron Tyrrell
Bank of America (BoA) gapped up from $6.99 a share to trade 24% higher on the open of the New York Stock Exchange last night.
Thanks to Warren Buffett’s $5 billion investment.
So… that’s it…
The Oracle of Omaha – the great sage of investing – has thrown BoA a five-billion-buck ‘lifeline’… He’s a true believer…
‘I… recognise,’ says BoA chief executive, Brian Moynihan ‘that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.’
Only Warren doesn’t really believe in the bank, does he?
No… Warren’s company Berkshire Hathaway may be long to the hilt on bank stocks… But he doesn’t believe they’re sound businesses, strong or well-led… (we’ll show you why this is the case in a moment… And why he’s prepared to tell you differently… )
But Warren truly believes in making deals that make him money.
Investing in outstanding companies trading at a discount to value is one technique he’s used to make who knows how much over the years…
But that’s not the only way to make a sound investment.
In this latest case, Warren’s bought $5 billion worth of ‘preference shares’. These shares give him a guaranteed return of 6% per year. Six per cent of $5 billion… $300 million a year… Not bad…
On top of that, the bank can buy these preference shares back from Berkshire Hathaway any time – for a 5% premium.
That’ll come to a $250 million gain on top of the $5 billion… Not bad either.
But it’s not great, is it?
I mean, 5%… 6%… These gains won’t set the world on fire. So why bother?
Consider this…
The stock market is volatile and uncertain right now… If you could get a guaranteed annual return of $300 million a year and a bonus $250 million when you sell, wouldn’t you take it?
And, if you were in Buffett’s shoes… Long to the hilt on bank stocks, looking for a way to turn the tide of investor sentiment in your favour… Could you think of a better way to boost investor confidence – and get the herd on your side – than throwing $5 billion at a bank that seemed like it was down for the count last week?
He might be getting a bit long in the tooth. But Warren’s no dummy.
He’s investing in a beat-down stock trading at its lowest point since the 2008 financial crisis. His investment, when compared to the size of the company, isn’t that big. He’ll get a guaranteed 6% return each year. And a bonus 5% if and when the bank buys those preference shares back.
Exciting? No. Profitable? Yes. Safe? You betchya.
What lesson could you take from this and apply to your own investment strategy right now?
Aaron Tyrrell
Editor, Money Morning
P.S. Our resident value-investment guru, Greg Canavan, looks for sound investment opportunities just like this for members of the Sound Money. Sound Investments service every day. In fact, he has 22 current open recommendations… And 11 of them are buys. For your chance to sneak a peek at Greg’s list of ASX-listed value plays, click here now
