Every investment company has to make public filings with the SEC that disclose its quarter-end investment positions. Comparing the changes between filings allows anyone to see the investment moves of high-level professionals, even though this comes with a lag.
Recently, the press has picked up on the results of two investments made by Warren Buffett/BRK during the financial crisis. He provided finance to Bank of America (BAC) and to General Electric (GE), two companies whose operations were under great stress because of recession. As he has done in other instances, Buffett demanded, and received, a long-running option to convert what were essentially commercial loans into the companies’ common stock at 2008 prices, in the case of GE, and 2011 prices, in the case of BAC.
BRK and GE, BAC
BRK has recently cashed out of its position in GE completely and has converted the BAC preferred stock it bought into common. Back of the envelope, here’s how Mr. Buffett made out:
–BRK lent GE $3 billion and received a total of $4 billion back, including the sale of all the stock bought through warrant exercise; a gain of 33.3% over nine years, during which time the S&P 500 gained 250%+.
–BRK lent BAC $5 billion. It has received about $2 billion in dividend payments and has a gain of about $11 billion on the BAC stock it now owns. That’s a gain of 260% over six years, during which time the S&P 500 gained about 110%.
Together: BRK lost $6.5 billion by its investment in GE vs. holding an S&P 500 index fund; it has gained $8 billion vs the index so far on holding BAC.
A more interesting question: did BRK do well or badly?
On GE, the answer is clear. The investment did very poorly.
On BAC, the answer is also clear. The investment gave BRK more downside protection, and higher income, than the common during a time when BAC was in hot water. And it came just before BAC began its long run of outperformance against the S&P 500. So this was a home run.
Regular readers will know that my overall view on Mr. Buffett is that he persists in using a manual typewriter in a Word (or Google docs) world. You have to hand it to him on BAC. But GE’s salad days were long gone when he put BRK’s money into it.