Warren Buffet is one of the greatest investors in history. So when he said “Bank of America is a strong, well-led company…I wanted to invest in it”, should investors follow his lead?
Simply put: no.
And the first reason for that is Warren Buffet has access that the average investor doesn’t. He can call Bank of America’s CEO and get him on the phone. He can tell him that he wants to invest in the company. And he can get a great deal that few can match.
For his $5 billion investment, Buffet got 50,000 shares of preferred stock. Those shares will pay an annual 6% dividend…that amounts to $300 million a year. As a point of reference, a common shareholder gets a dividend of one penny per share each quarter. And you and I can’t get the next part of the deal: warrants to buy 700,000 shares at $7.14 a share anytime over the next ten years. Typically warrants are issued at a good premium to the share price, but not in this case.
What has been considered a vote of confidence from Buffet is really a little more like a privileged investor taking advantage of an opportunity. The take away here is that we can’t invest like Warren Buffet, so don’t try.
And the second reason not to invest in Bank of America is that it’s Bank of America. Never mind the string of lawsuits. Never mind talk of the need to raise capital to restore its balance sheet. Never mind the need to cut as many as 40,000 jobs. Beyond the fact that financials are lagging every other sector…down -23.1% year-to-date, the stock is in a long-term downtrend, and its going nowhere fast.
While shares jumped 25% on the news of Buffet’s investment, reality set in a few days later. The stock is a long-term sell, and for anyone other than Warren Buffet, this is no buying opportunity.