All over the news, there has been talk of Warren Buffett buying preferred shares of Bank of America and getting a great deal that individual investors simply couldn’t get. And you’re right about one thing – Bank of America isn’t going to be calling up small investors any time soon and offering them preferred shares. But there are ways to get the same deal as Buffett, and not own preferred shares!
First, this is what Warren Buffett’s deal with Bank of America looks like:
- Amount Invested: $5 Billion for Preferred Shares
- Annual Dividend: 6%
- Other: Received Warrants for 700 million shares at $7.14
- Buy-Back: Anytime for a 5% premium
Now, how can you get a similar, possibly better deal? First, you need to look at Bank of America bonds. There are a lot for sale, some with yields of 7.375%. That is a whole percentage higher than what Buffett negotiated. Those bonds also have a maturity of 3 years, which is probably about as long as Bank of America will keep Buffet’s investment. The other important thing to note about the bonds is that bondholders are paid before stockholders (even preferred stockholders), and they get first call on assets in a bankruptcy (also above preferred shareholders).
The second half of the equation is buying BAC shares whenever the price dips below $7.14, which it has done hundreds of times in August, and will most likely continue to do so in September. If you buy on the dips, you can build a position that will gain, even is Buffett exercises the warrants.
So what would this portfolio look like:
- Investment: $20,000
- Bonds: $11,043 @ 7.375 until 5/15/2014
- Stock: Dollar cost average $9,000 in dips below $7.14 – average dip has been to $6.84 to date
With this mix, you would have a total return that includes a bond with a high coupon, and common stock, which has a small dividend and growth potential. You return on your $20,000 investment would be $827.03, which would be a 4.13% annual return, not including and stock price increase. You could shift more into bonds to bring your portfolio closer to Buffett’s return, but this mix is still better than what you would get with just stocks alone.
Almost every investment Buffett has made can be mimicked in similar terms if you are interested. However, that is a lot of money to invest in a single company. You do get the protection of being a bondholder versus a stockholder in the scenario above, but that isn’t much protection if the company does go under or is dissolved by the government. Plus, to have gotten the best stock price on BAC, you needed to buy in several months ago, not now.
Readers, what are your thoughts? Have you ever bought both the stock and bond of a company to maximize your return?
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This post was written by...
Robert – who has written 317 posts on The College Investor.
Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.
{ 4 comments… read them below or add one }
Interesting investment, although I prefer to invest in mutual funds. I like the idea of spreading m risk.
I think you said it well, Robert. I think we can learn much from almost every investment that Buffett has made.
I like your plan. I haven’t thought of it that way and may try it with BAC if I can round up any spare fund. Thanks!
I have never bought a company’s stock directly, I only get equity through diversified funds. But it is interesting to think about the possibility of buying both. I would just caution small time investors to remember to diversify if you are going this route.