Every investor would love a chance to buy a popular blue chip stock at a 70 percent discount to market price. On Friday, Warren Buffett’s Berkshire Hathaway (ticker: BRK.A, BRK.B) did just that when Buffett exercised warrants to buy 700 million shares of Bank of America Corp. (BAC) at a price of only $7.14 per share.
With Bank of America trading above $24 on Friday, the purchase immediately represents an on-paper profit of $12 billion. Buffett’s big payout is an excellent example of the potential benefits of the calculated, long-term investment style that has made him one of the wealthiest people in the world.
While it may seem as if Buffett’s Bank of America buy is an overnight success, the huge profit is actually six years in the making. Berkshire Hathaway acquired the Bank of America warrants back in 2011 when Buffett invested $5 billion in Bank of America to help shore up its balance sheet in the wake of the 2008 financial crisis. As part of the deal, Berkshire received preferred shares of BAC stock, as well as warrants to purchase 700 million common shares at $7.14 per share any time prior to 2021.
On the day prior to the Buffett deal in 2011, Bank of America stock had closed at $7.65 per share.
“Bank of America is a strong, well-led company, and I called [CEO Brian Moynihan] to tell him I wanted to invest in it,” Buffett said in 2011. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”
The investment seems like a no-brainer now that Bank of America shares are trading well over $20, but Buffett’s true genius is recognizing long-term opportunities at times the rest of Wall Street is most uncomfortable. Buffett made similarly structured investments in General Electric Co. (GE) and Goldman Sachs Group (GS) during the heart of the financial crisis in 2008.
Buffett informed Berkshire investors of his intention to exercise the warrants in his annual letter to shareholders earlier this year. Berkshire is not a dividend stock, yet the company had been generating…
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