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NY Times: Buffett’s Not-So-Golden Touch

By Michael Kling   |   Friday, 16 Sep 2011 08:57 AM

It doesn't always pay to follow Warren Buffett's investment choices. If you do, you had better know the difference between preferred and common stock.

Buffett is well-known as one of the best investors around, perhaps even the best stock picker ever. Many investors follow his every word, hoping that buying Buffett's choices will get them rich.

Next month Buffett's $3 billion investment in General Electric in 2008 will return $300 million plus accrued and unpaid dividends, points out The New York Times Deal Book column. His shares have returned a 10 percent annual dividend, about $300 million a year.

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Warren Buffett
(Getty Images photo)
But Buffett purchased preferred shares, notes the Times. Someone buying GE common stock at the same time would have seen their investment drop by 40 percent as GE shares fell from about $24.50 to $15.40

Ditto for Goldman Sachs. His $5 billion purchase of preferred shares in 2008 returned a total of $1.7 billion earlier this year, the column notes.

Over the same time, Goldman Sachs common stocks went from around $125 to $104.

In both investments, Buffett warrants to purchase common shares at specific prices, the Times explains.

As the name implies, preferred stock, a combination of debt and equity, offers investors better terms than common stock. Preferred stock owners get better dividend payments and better terms in liquidation, although they typically don't have voting rights.

His investment in Bank of America is similar. Under the deal's terms, Berkshire Hathaway gets a 6 percent annual dividend and a premium of $250 million at redemption, the Times column says. Berkshire has the right to by 700 million shares at a strike price of about $7.14 over the next 10 years. Although the stock performance is uncertain, any gains will just be icing on the cake.

Buffett's $5 billion purchase of Bank of America shares prompted the bank's stock to increase as common folk tried to follow his example, a phenomenon called the Buffett bounce.

Buffett got a special deal when he purchased the preferred shares, Jeff Matthews, a fund manager in Greenwich, Conn., told Reuters.

"Bank of America won't sell them to Joe Blow. They only will sell them to a guy named Warren Buffett."

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It doesn't always pay to follow Warren Buffett's investment choices. If you do, you had better know the difference between preferred and common stock. Buffett is well-known as one of the best investors around, perhaps even the best stock picker ever. Many investors follow...
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