* Buffett can negotiate better terms for deals
* Investors keen to follow him can try regional banks
By Aaron Pressman
BOSTON, Aug 25 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
"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,"
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
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)