Cash Is King – Just Ask Warren Buffett

By: ispeculatornew
Date posted: 09.06.2011 (7:00 am) | Write a Comment  (0 Comments)

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You probably read the headline quickly but very recently, Warren Buffett made a private deal with Bank of America (BOA) where he purchased $5 billions worth of preferred shares that pay a 6% dividend. Is that it? No, he also gets the option to buy what currently represents 6.5% of the company 10 years from now at $7.14 per share. It’s an outstanding deal isn’t it? Talk about little downside.

Everyone Looks Like A Winner

For Bank of America, the benefits are fairly obvious; enhanced liquidity without having to raise more money while Berkshire (BRK.B) gets a great dividend yield, with decent upside and limited downside (as preferred shares, he would priority over standard shareholders in the case of bankruptcy) and the shareholders saw their stock value increase significantly following the sign of confidence from the most known investor in the world.

Mr. Buffett implicitly endorsed Mr. Moynihan on Thursday, calling the bank a “well-led” company. “I am impressed with the profit-generating abilities of the franchise and that they are acting aggressively to put their challenges behind them,” he said in a statement released by the bank.

One Surprising Thing About This Deal

In a similar way to when Warren did the deal with Goldman Sachs (GS) in 2008, I do remain skeptical/surprised about one aspect of the deal. Buffett always argues that he only invests in businesses that are simple to understand. Most of his holdings are of that nature. Companies such as Disney and Coca-Cola (KO) are easy to understand and while they are huge, looking through financial statements should give us a fairly accurate picture. That would not be the case with most financials these days. They own assets that are very difficult to value, have all kind of potential pending lawsuits and a quickly changing environment with laws changing very frequently.

The One Big Lesson

The one thing that I personally take from this latest deal done by Warren is the importance of holding cash. If no opportunities are good enough, keep more cash aside in order to profit when big opportunities arise. The tricky part is that those will usually happen when there is panic and a lot of negativity about the markets as was the case in 2008 as well as these days.  Now of course, most of us will not have enough cash to call a company’s CEO to propose a deal but that does not mean that great opportunities will not be there to take.

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