If you believe recent commentaries, Berkshire Hathaway’s Warren Buffett – once considered one of the greatest investors in the world – is now “too old” for investing and is washed up, tired, and has lost his touch. The people making these comments have clearly not taken the time to examine Berkshire’s financial statements!
In investing, timing is everything. An undervalued investment can sometimes take months or years to begin rising in price; and, while waiting, returns will be stagnant. Berkshire has found a way around this problem. Berkshire is now so synonymous with safety and stability (and for being a good business partner) that it obtains exclusive deals – unavailable to anyone else - where it is actually paid to wait.
Take, for example, Berkshire’s investment in Bank of America. BAC’s current share price is $7.07. Berkshire bought preferred shares of BAC that earn 6%. With this preferred share deal came warrants to purchase up to 700 million shares of BAC at $7.14 per share, and these warrants don’t expire until 2021. In other words, any time between now and 2021, Berkshire can purchase BAC shares at $7.14 per share, even if the stock doubles or triples (or more). While waiting, Berkshire earns 6% on the Preferred shares!
Berkshire has a similar deal with Dow Corporation. Berkshire currently earns 8.5% on Dow Preferred Shares. Berkshire can purchase up to 72.6 million shares of Dow at $41.32 per share with no expiry date, except the stipulation that Dow has the option to redeem the preferred shares when the stock attains stable prices of $53.72 or more! Put more simply, this means that Berkshire will earn 8.5% from its investment in Dow for months or years, and then make at least $12.40 per share ($52.72-$41.32) when the Preferred shares are converted to common shares, for an additional profit of 900 million dollars.
Berkshire Hathaway is an incredible moneymaking machine...especially for those who have the luxury of time, and the patience to wait.
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"The most important attribute for success in value investing is patience, patience, and more patience. The majority of investors do not possess this characteristic."
Peter Cundill
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