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Berkshire Hathaway's Bank of America win is proof you can't invest like Warren Buffett

Myles Udland
·Markets Reporter

There is only one Warren Buffett.

Because while Buffett’s skill as an investor and an allocator of capital is well-documented, the single-biggest reason that no one else can invest like the Oracle of Omaha is that at this point in his career, he gets access to deals no one else does.

And Berkshire Hathaway’s big win on its $5 billion stake in Bank of America (BAC) is the latest example of why.

Back in 2011, Buffett took a $5 billion stake in Bank of America through the use of preferred stock, which paid a 6% coupon per year giving Berkshire a $300 million annual payment. This stake also included warrants for Berkshire to buy 700 million common shares before 2021 for an additional $5 billion.

In a note to clients on Thursday, Barclays analyst Jay Gelb wrote that Berkshire’s unrealized investment gains on these warrants currently stand at $12 billion.

On Tuesday, Bank of America announced that after passing the Federal Reserve’s latest stress test — an exercise implemented after the financial crisis that requires big financial institutions to prove they have the capital to sustain operations in a recession — it would raise its dividend to $0.48 per year.

As a result, Berkshire Hathaway announced Friday it would exercise these warrants and take the common. Buffett said in his latest letter to shareholders that if Bank of America’s dividend exceeded $0.44 per year he would exercise this warrant. Buffett added that Berkshire can use the preferred shares to exercise this warrant, making this a cashless exchange.

And so just like that, Berkshire becomes the largest shareholder in the second-largest bank in the U.S. and will get a $336 million annual payment from the dividend alone.

Buffett and Munger’s opportunities

Many see Warren Buffett as an expert stock-picker, or a devotee of buy and hold investing, and while there is truth to both of these the real advantage Buffett has now is being, well, Buffett.

Earlier this month, for example, Berkshire said it would provide a $1.5 billion line of credit and buy 40 million shares at a 30% discount to current market pricing of troubled Canadian lender Home Capital Group. And while some investors think Home Capital is ultimately going to $0, this kind of deal is simply not available to perhaps any other investor in the world.

And Buffett and Berkshire vice chairman Charlie Munger know it.

Shortly after the Berkshire Hathaway annual meeting this year, Munger said that one of his favorite investments in recent years was buying into the airport in Shanghai. When asked by Yahoo Finance how one gets that kind of opportunity, Munger said, “I have a very nice young Chinese-American who helps me. He speaks the language and goes over there all the time… It takes extra work. But why should it be easy to get rich?”

Which is, in essence, Munger saying, “I can do something you can’t. Deal with it.”

Berkshire Hathaway vice chairman Charlie Munger
Berkshire Hathaway vice chairman Charlie Munger

And these are but a few examples of the access to investment opportunities that Buffett and Munger enjoy that simply no one else does.

During the financial crisis, Buffett lent Goldman Sachs (GS) $5 billion, earning $1.7 billion in just under three years on the deal. Buffett also made more than $1 billion from his $3 billion investment in GE Capital — now Synchrony Financial (SYF) — which he also made during the crisis.

Bank of America buybacks

Along with increasing its dividend, Bank of America said it had also authorized the repurchase of $12 billion worth of its shares through June 30, 2018.

In his latest letter to shareholders, Buffett added that, “Many of our investees, including Bank of America, have been repurchasing shares, some quite aggressively. We very much like this behavior because we believe the repurchased shares have in most cases been underpriced. (Undervaluation, after all, is why we own these positions.) When a company grows and outstanding shares shrink, good things happen for shareholders.”

Gelb also noted that this will make Berkshire the largest shareholder of Bank of America, owning about 7% of the company’s outstanding stock. Berkshire is also Wells Fargo’s (WFC) largest shareholder, making it now the largest shareholder of the second- and third-largest U.S. banks.

Todd Combs, who along with Ted Weschler is one of Berkshire’s two investment managers, also sits on the board of JP Morgan Chase (JPM).

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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