Sometime around 1980, can't remember exactly, there was a flight of money from many countries to Switzerland. The clock makers had so much money pouring in that the banks took interest rates to zero and even for a period of time were actually making you pay ½% interest to them to put your money in their banks. Yes, it actually happened because people believed their money was going to be safe there. It was.
Warren Buffett recently sold some convertible debentures - about $400 million. These are bonds that can be converted into shares of stock in the same company, namely Berkshire Hathaway (BRKA). Mr. B said the money was to be used for general purposes and possible acquisitions. Their statement indicates they have plenty of money now, but Warren is very good at buying companies that are in trouble.
What Warren has done has never been done to the American investor before or at least I haven't heard of it. The bond portion of the offering only pays 3% interest. Not much, but Berkshire Hathaway has an excellent history of making money so investors would rather have 3% for sure than 5% of maybe not getting their money with another company. But here is the kicker that sets Mr. B apart from anyone else. Along with the debenture come a warrant. A warrant in this instance is like an option to buy additional shares - nothing new here. If you want to keep the warrant active you must pay Berkshire Hathaway 3 ¾ % interest.
The warrant is convertible into the stock of Berkshire Hathaway at a price 15% higher than the price on May 21, 2002, about $78,000. The stock has to go up to $89,700 to break even. In other words you are giving Mr. Buffet say $100,000 for which he is paying you 3%, $3,000 annually, and in turn to keep the warrant you are then paying him 3 ¾%, $3,750 annually. He is using your money until the year 2007. Wow! What a deal - for him. The reason Warren can get away with this is that he has a great reputation for making money. If, and that is a big "if" in this bear market, the stock of Berkshire does go up you will be able buy it at a real bargain. That is the reason you are paying the premium. Today's Price/Earnings ratio is 101 and the S&P Index is 41. What will the P/E and price of Berkshire be if the P/E of the S&P goes to 17?
Mr. Buffett himself has said we are going to have to be very astute to make 5% in the market over the next 7 or 8 years. Any stock in a bear market is like a ship that is in the water. When the tide goes out all the boats go down. This is a bet that investors believe Warren can beat the bear. He thinks we are in for a long-term bear from which he can't help but profit because he will not have to pay off the warrants.
It is hard to believe anyone who is an astute investor would buy this; however, the offering was oversubscribed. Warren Buffet you are a genius.
Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter to receive his market letter for 3 months at www.mutualfundmagic.com to discover why he's the man that Wall Street does not want you to know.
Comments to al@mutualfundmagic.com
Copyright Albert W. Thomas All rights reserved.
Trading is a fascinating activity.There are so many layers to... Read More
Among the largest forces that affect stock prices are inflation,... Read More
This is an extract of an article which was first... Read More
When it comes to mutual funds, there is a lot... Read More
You probably have been told that options are risky. Even... Read More
The big bad bear is stirring again. So far he... Read More
Success in small cap & micro cap stock trading like... Read More
Look back over the years and try to remember how... Read More
Much like the middle child, mid-cap stocks have long struggled... Read More
Jack and Jill went up the hill to fetch a... Read More
On Friday or Saturday evening my wife gets a movie... Read More
You have decided to buy some stock or mutual funds,... Read More
The date October 13, 2000 will forever be embedded in... Read More
The demand for world oil is increasing while world reserves... Read More
When most analysts, financial planners, fund specialists and investors try... Read More
In today's volatile and confusing stock markets everyone is searching... Read More
I use the P/E ratio as a secondary indicator for... Read More
Unfortunately, most of you who are reading my column are... Read More
1. Do not spread your money too thin.My friend has... Read More
One of the big advertising kicks today from mutual funds... Read More
For years I have been saying you must have a... Read More
Maximizing a stock market investmentThere are several factors an investor... Read More
To begin, you might look at playing the stock market... Read More
Has your broker been calling you recently with the "great... Read More
Fundamental analysis.Fundamentals analysis says the best way to predict the... Read More
One of the great "secrets" of successful people is discipline... Read More
Wall Street's watchword has always been diversification, but what does... Read More
Sidney felt sick as she looked at her latest OptionsXpress... Read More
Are you attracted to the idea of being in control... Read More
As the man said, "I've got some good news and... Read More
Do you own any mutual funds? In an IRA or... Read More
When you stand on the ocean shore and watch the... Read More
The bulls and bears of the stock market are both... Read More
A PEG ratio cannot be used alone but is a... Read More
First let's see what protectionism is. According to Mr. Webster... Read More
There is so much involved in developing peak performance, that... Read More
Did you know you can make money (and a lot... Read More
In a previously written article, we expanded the use of... Read More
The stock market has not been very kind to your... Read More
The ABC's of Stock Trading SuccessStock trading success...why is it... Read More
Using Swing Trading Strategies and Technical Analysis when Trading Stocks... Read More
Has your broker been calling you recently with the "great... Read More
Every day I hear someone on CNBC proclaim that "this... Read More
Several times each month I am solicited by various market... Read More
Dollar cost averaging is one of the most popular ideas... Read More
IT'S REMINISCENT OF THE OLD children's tale about an old... Read More
The broker told me not to sell because the mutual... Read More
Very few people, even professionals, have heard of the Dalbar... Read More
I often hear from people, "I don't trade. I invest.... Read More
Today we are inundated with tons of information about the... Read More
We need a rabbit!This was a pretty horrible week for... Read More
Most stock market traders have a favorite technical indicator.The one... Read More
The Macedonian Stock Exchange (MSE) is not operating successfully. True,... Read More
On November 17 I bought 7 different mutual funds and... Read More
As an investor you will want to check out any... Read More
The thinking process of the brain relating to the... Read More
Sometime around 1980, can't remember exactly, there was a flight... Read More
I have a 2-car garage. There are nice shelves on... Read More
The Surgeon General of the United States says that smoking... Read More
This is a rather simple strategy with which I am... Read More
Reduce your investing and stock market risks by:Setting your sights... Read More
One of the most believed bits of conventional wisdom from... Read More
The trading method you employ to approach the stock market... Read More
Cat or dog? Maybe Zebra. Shucks, I don't know, but... Read More
There are major differences between trading stocks and trading futures.... Read More
In 1960 an engineer working for a watch company in... Read More
Stocks & Mutual Fund |