Investors who follow Buffett in BofA may be sorry

Thu Aug 25, 2011 5:03pm EDT

* Buffett can negotiate better terms for deals

* Investors keen to follow him can try regional banks

By Aaron Pressman

BOSTON, Aug 25 (Reuters) - Following Warren Buffett is usually an easy way to make money, but in the case of the oracle's investment in Bank of America Corp (BAC.N) investors may find it a lot tougher.

Buffett is buying preferred shares with ample warrants thrown in as a sweetener-- a deal not available to the general public.

"Bank of America won't sell them to Joe Blow. They only will sell them to a guy named Warren Buffett," said Jeff Matthews, a fund manager in Greenwich, Connecticut and the author of the book "Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett."

Still there is hope for investors -- they can buy the shares of other bank stocks that have been beaten down, now that the sector appears to be rallying, fund managers said.

Buffett's investing skills are beyond dispute, with a 30-year track record that outperformed the Standard & Poor's 500 Index by 11.1 percentage points a year, according to one study. And studies show investors can profit almost as much by buying stocks that Buffett has disclosed owning.

But the Oracle of Omaha can often get a better deal than regular investors, as when he invested in Goldman Sachs Group Ind (GS.N) and General Electric Co (GE.N) via preferred shares during the 2008 financial crisis. [ID:nN1E77O0LE]

Those deals were similar to his Bank of America investment. Buffett's Berkshire Hathaway Inc (BRKa.N) surprised the market on Thursday with a $5 billion investment in cumulative preferred stock of Bank of America that will pay a 6 percent annual dividend. Buffett also got 700 million warrants giving him the right to buy common shares at $7.14. [ID:nN1E77O0PL]

In both the GE and the Goldman investments, Buffett made out well, collecting annual dividends of 10 percent. And Goldman bought back the preferred shares at a 10 percent premium in March.

But investors who followed Buffett's moves by buying common stock have had mixed results. Goldman common shares gained almost 30 percent from when Buffett bought in until Goldman retired his preferred shares this year. GE shares have lost 36 percent since Buffett's purchase.

"GE is still underwater, but Warren hasn't been hurt," said Andrew Kilpatrick, a former stock broker and journalist who authored 'Of Permanent Value: The Story of Warren Buffett.' "He's still getting a dividend and he has the warrants."

Bank of America shares shot up as much as 26 percent on Thursday after Buffett's investment was disclosed. The shares sold off later in the day and ended with at $7.65, a gain of more than 9 percent, on the New York Stock Exchange.

"To go out now and buy Bank of America stock after it's popped up, just to follow him, may not be the best move," Kilpatrick said.

Still, some investors said there were other ways to piggyback on Buffett's bank pick, which could bolster confidence in the entire banking sector.

New York hedge fund manager James Altucher, author of the book "Trade Like Warren Buffett," said investors should consider buying shares of other banks dragged down by recent worries, such as regional Ohio bank Huntington Bancshares Inc (HBAN.O). That bank's shares have dropped 20 percent over the past month, but insiders such as chief executive Stephen Steinour have been buying thousands of shares recently.

"Buffett can't buy the smaller banks like that, which is why he has to find the biggest bank of all," Altucher said.

"It gives a good vote of confidence to the oversold U.S. banking system from the best bank analyst on the Street," said Leora Garner, president of Laurel Grove Capital LLC in Los Angeles.

The firm's biggest holding is Berkshire Hathaway and it also owns Bank of America shares.

American University finance professor Gerald Martin, one of the authors of a 2008 study that measured Buffett's superior stock picking abilities, said the Bank of America deal also highlighted Buffett's negotiating skills.

"It's another great investment for him and shows that he makes better deals than the government," Martin said. "A guaranteed 6 percent yield for 10 years with the upside based on a hopefully improving economy." (Additional reporting by Herb Lash and Joseph Giannone in New York; editing by Dan Wilchins and Andre Grenon)

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