Warren Buffett and Bank of America: Don’t Try This At Home

So, Warren Buffett just invested $5 Billion in Bank of America (BAC), should you? This latest Buffett deal  should come with fineprint “Performed by World’s Greatest Investor, Do Not Attempt At Home”.

I’m not sure if Buffett’s investment (or “capital infusion”) says anything about his own view on BAC’s intrinsic value. Like his previous deals with GE and Goldman Sachs, Buffett’s terms are extremely favorable. In today’s low interest rate environment, this is a pretty easy way for Berkshire Hathaway’s (BRKB) insurance subsidies to get a 6% return. BAC on the other hand gets the much needed confidence and credibility boost of having the Oracle of Omaha’s backing.

The real benefit to Buffett and Berkshire shareholders come from the warrants.  According to the press release, the deal gives Berkshire 10 year warrants to purchase up to 700M common shares of BAC at $7.14. The stock closed Thursday at $7.65, so any jump in BAC stock over the next decade, even if temporary will add significant icing to Buffett’s cake.

I am sure that Buffett did a lot of due diligence on BAC before making this deal. However, investors should be warned before copying Buffett, since some of his sweetheart arrangements have not led to strong returns for the coattail riders. If you are considering buying stock in BAC on this news, research the company and come up with your own intrinsic value to determine if investing makes sense.  To me, BAC, like most large banks, is a black box. Their 252 page 2010 annual report is exhibit number 1 full of references to unknown legislation and litigation and opaque insights into loan quality. Today, Vitaly Katsnelson put it best when he said “BAC is like a hot dog you don’t really know what goes into it. Buffett with his investment just put a Kosher sign on it.”

For further insight, watch the video of Buffett on CNBC.

One final thought on the Buffett BAC investment. Some commentators believe this deal is politically motivated, given that Buffett met with President Obama earlier this week. Anyone who has followed Buffett’s career knows this is ridiculous. This is a man who won’t even wager on holes of golf with his friends, saying “I never break my discipline”. For investors considering following Buffett, remember to stick to yours.

Disclosure: Long BRKB

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