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Wednesday, August 31, 2011

Should You Follow Buffett?

MoneyCone has written a must read analysis, "Following Buffett Blindly Can Be Injurious to Your Wealth,"  from the perspective of the investor who might consider jumping on the coattails of some of his deals.  Be sure to note the very apt art on the article showing a pack of "SMOKEME" cigarettes.

It is not easy for me to write objectively about Buffett's latest deal, Bank of America, because formerly I was a managing director at an investment subsidiary of theirs and saw first hand and experienced how they operate.  I have to say that I just don't understand why someone of Buffett's stature would deal with them (or Goldman Sachs for that matter) even with the outrageous terms he obtains.  I, for one, would grab my wallet and be sure to never let the likes of Hugh McColl or Ken Lewis get behind me. Dealing with their top management reminds me of Indiana Jones in the snake pit.

Many times I like to start a presentation by quoting Buffett to the effect that most investors are better off investing in low-cost index funds.  This is met with the question of why would Buffett recommend this when he invests in individual stocks?  The answer I jokingly give is that, if the questioner looks in the mirror and sees Buffett looking back, he can forget the recommendation to use index funds.  The more serious answer is that Buffett doesn't invest in individual stocks like most investors.  Even from the beginning, he visited companies and jumped right into their finances.  This morphed into an approach where he controlled companies and literally replaced the dead wood.  Today his stature enables him to rescue or semi-rescue firms by providing capital at terms that make even seasoned investors gasp.

The investment markets attract many people who are looking for an easy way to get rich.  Naturally the thought crosses their mind to follow the likes of Buffett.  In fact, there are generally a couple of shelves of books in most bookstore business sections devoted  to Buffett's investment approach.  After al,l how can you go wrong following a man with the performance record of Warren Buffett?

MoneyCone answers this question with the numbers.  His article is worth reading more than once by every DIY investor.


  1. There's a big difference between Buffett buying preferred with the option to purchase common at a given price in a sweetheart deal, and Buffett purchasing common outright on the open market. I would never read one of Buffett's preferred purchases as a sign to mortgage the house and buy common. It is going to take BAC quite a while to work through the problems with the acquisitions that Ken Lewis overpaid for at the height of the financial crisis. In 5 years BAC common could be worth 0 or 25 bucks a share if they can work through many of their problems. In either case, Buffett will profit.

  2. Thanks Robert for the mention and the kind words! I'm sure BofA did not do it for the money. This was an attempt to put breaks on a tumbling stock price.

    Citi tried with a reverse split, which didn't help C much.

    BofA's approach is a proven winner, BofA knew that and agreed to Buffett's demands!

  3. MoneyCone's post on BAC and Buffett is exceptional. As The Grouch points out, this is a special preferred shares deal, that has nothing to with the common stock. It's important for investors to realize Buffett's deal with BAC has nothing to do with company fundamentals - it's a pure profit play.