Friday, September 9, 2011
Why You Shouldn't Follow Warren Buffett's Lead and Sink Your Life Savings Into BOA
I know what you are thinking, "Warren Buffett is a really smart guy and must know something I don't, so I need to buy into Bank of America".
Read this sentence twice: Warren Buffett is the world's most successful investor and he's not stupid, but I am.
The news media was quick to hype that Buffett invested $5 billion, a big chunk of his net worth in to BOA, and that caused the stock to run up about 20%. Those were some of the "stupid people". They have now lost their bet since the stock has since settled back down to under $7.00 a share.
What the media they didn't spell out is that Buffett wasn't buying the common stock traded under the ticker symbol of BOA. In fact Buffett got a sweetheart deal, "Bank of America will sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend. Bank of America can buy back the investment at any time by paying Buffett a 5 percent premium." according to a Boa press release.
That is $100,000.00 per share to us common folks $7.00.
Buffett likes the limelight and the attention, and at 81 he might be old but he's not stupid. The BOA deal gave him what he wanted attention and a guaranteed out with a pretty much unlimited upside.
Bank of America CEO Brian Moynihan acknowledged the investment in a recent statement, I recognize the "large investment by Warren Buffett is a strong endorsement in our vision and our strategy."
What Moynihan didn't say was that by owning the "Cumulative Perpetual Preferred" stock Buffett would be paid before any other investors if the bank was forced to liquidate or what other deals where made to seal the deal.
In other words Buffett just buffaloed his way to the front the line like Asian Tourists getting on to a NYC subway.
And this is why he did it, Bank of America is worth close to $23 dollars a share post breakup today. The Merrill Lynch unit is worth close to $7.00 alone according to a fellow share holder Buzzy Geduld. Gerduld is one of many large share holders calling for the breakup of BOA.
However if the bank considered "too big to fail" loses anymore traction the powers that be will step in to force a quick break up of the behemoth and Buffett gets paid off, but the common stock holders get nothing.
Like I said Warren Buffett is a really smart guy.