Beware of "Oracles" Bearing Bailouts

Brett Arends MarketWatch August 26, 2011

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Aug. 26, 2011, 12:00 a.m. EDT

By Brett Arends, MarketWatch

BOSTON (MarketWatch) "” A word of warning to Bank of America stockholders: Beware Greeks bearing gifts"¦ and Oracles bearing bailouts.

Warren Buffett, the Oracle of Omaha, has plunged $5 billion into Bank of America /quotes/zigman/190927/quotes/nls/bac BAC +1.07% . And ordinary stockholders "” including, I suspect, a fair number of Mom and Pop investors "” have jumped on the bandwagon. Bank of America stock, which has been tumbling for months on fears of crisis, rocketed nearly 10% on Thursday.

Should you follow suit? I mean, Warren Buffett knows what he's doing, right? If he's investing, the bank must be a good buy, yes?

Not so fast.

/quotes/zigman/190927/quotes/nls/bac BAC 7.73, +0.08, +1.07% Bank of America

Buffett isn't buying the common stock that you or I would buy. He's buying preferred stock. That's a totally different thing. Preferred is a type of corporate debt. It pays a hefty dividend, and it ranks above the common in the event Bank of America folds up shop.

Buffett's preferred comes with a juicy 6% yield. Ordinary investors should be so lucky.

Buffett's latest move brings back memories of two similar deals he struck during the financial crisis in the fall of 2008. He plunged $5 billion into preferred stock in Goldman Sachs /quotes/zigman/188479/quotes/nls/gs GS +1.28% , and $3 billion into preferred stock in General Electric /quotes/zigman/227468/quotes/nls/ge GE +0.58% . Both paid 10% yields.

Investors on Wall Street were citing those brilliant moves to justify jumping into Bank of America stock.

But they need to do their homework.

Warren Buffett made profits on both those moves. But investors in the common stock of Goldman Sachs and GE have not.

Buffett invested $5 billion in Goldman on Sept. 23, 2008. At the time, Goldman common stock was $125. It immediately jumped to $133 on the news.

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A few months later it had crashed all the way to $52. So anyone who responded to Buffett's investment by purchasing Goldman common stock quickly lost about 60% of their money.

Today Goldman is just $108. Nearly three years' later, you're still in the red.

How about GE? Buffett invested $3 billion on Oct. 1, 2008. At the time the common stock was $25.

/quotes/zigman/190927/quotes/nls/bac Add BAC to portfolio BAC Bank of America Corp. $ 7.73 +0.08 +1.07% Volume: 320.41M Aug. 26, 2011 2:29p var embeddedchart728891016Chart = new EmbeddedChart('#embeddedchart728891016', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:BAC'); jQuery.data($('#embeddedchart728891016').get(0), 'embeddedchart', embeddedchart728891016Chart); /quotes/zigman/188479/quotes/nls/gs Add GS to portfolio GS Goldman Sachs Group Inc. $ 111.25 +1.41 +1.28% Volume: 5.47M Aug. 26, 2011 2:29p var embeddedchart1685131760Chart = new EmbeddedChart('#embeddedchart1685131760', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:GS'); jQuery.data($('#embeddedchart1685131760').get(0), 'embeddedchart', embeddedchart1685131760Chart); /quotes/zigman/227468/quotes/nls/ge Add GE to portfolio GE General Electric Co. $ 15.54 +0.09 +0.58% Volume: 40.00M Aug. 26, 2011 2:29p var embeddedchart1591023426Chart = new EmbeddedChart('#embeddedchart1591023426', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:GE'); jQuery.data($('#embeddedchart1591023426').get(0), 'embeddedchart', embeddedchart1591023426Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //}); Page 1 Page 2 var OB_permalink= 'http://www.marketwatch.com/story/should-you-follow-buffett-into-bank-of-america-2011-08-26'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments on this story 55 Comments Most Popular Jennifer Waters's Consumer Confidential 10 hurricane survival tips for New York, D.C. 1. The Fed Bernanke: Fed will decide next month on new policy 2. Slide Show The 10 best places to live in the U.S. 3. Market Snapshot U.S. stocks gain in wake of Bernanke 4. Portfolio Insights by Brett Arends Should you follow Buffett into Bank of America? 5. Join the Conversation 55 Comments 1,000 characters My comments... Community guidelines » Add Comment Breaking Insight Al Lewis Why can't we tell Henry Paulson is a hero? Thomas Kostigen's Impact Investor Why charity should use an investing model MarketWatch First Take America's unemployed can't wait, Bernanke says Eric Holthaus's Forecasting Profits Hurricane Irene looking extremely dangerous Find a Broker Partner Center » Video Juniper Networks Shares Knocked Back Netflix Swings Wildly, But Keeps Barrelling Ahead Travelzoo, On Cloud Nine, Suddenly Loses Altitude WebMD Catches Flu from Bears About Brett Arends RSS News feed

Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand

Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse

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A few months later it had crashed all the way to $52. So anyone who responded to Buffett's investment by purchasing Goldman common stock quickly lost about 60% of their money.

Today Goldman is just $108. Nearly three years' later, you're still in the red.

How about GE? Buffett invested $3 billion on Oct. 1, 2008. At the time the common stock was $25.

Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand

Brett Arends

Portfolio Insights by Brett Arends

Should you follow Buffett into BofA?

Jennifer Waters

Consumer Confidential

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John Dvorak

Digital Dvorak

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Myra Saefong

Commodities Corner

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John Shinal

Tech Investor

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Al Lewis

Al's Emporium

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Howard Gold

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Thomas Kostigen

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Jon Friedman

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Bill Mann

Read Full Article »

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Beware of "Oracles" Bearing Bailouts

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