This past week was quite a week for the markets, with a record move in gold and Bernanke's comments leading the charge. However, there was also unexpected news in Warren Buffett's investment in Bank of America and the resignation of Steve Jobs from Apple.
Yes it's true that Buffett made an investment in BAC, but I certainly don't think it's the vote of confidence some make it out to be. The worst offender in that regard, as always, is CNBC. Early in the morning, their main caption headline was "BAC up on Buffett investment in stock". This is very misleading. The cumulative perpetually preferred shares Buffett received can barely be classified as stock. With a guaranteed 6% return, and no market risk (par liquidation value), Buffett is not really accumulating any real equity in the company. Then there are the warrants, which give Buffett the ability, but not the obligation, to truly invest in BAC stock.
So what does it mean for BAC shareholders? Yes, there's a vote of confidence that BAC will not go bankrupt any time soon. But at the same time, the warrants mean that the shareholders can suffer heavy dilution at any time. Who wants to own equity in a company that has such an huge overhang limiting its upside? Of course some say that Buffett is a long term investor. If Buffett exercises those warrants, it's because he plans to hold a large piece of the company for a long time. That may be true. But the warrants last for 10 years, and is it clear that Buffett will still be there in that time?
Which leads me to what I thought was one of the more interesting questions to come out of the events this week. Would I rather have Berkshire without Buffett or Apple without Jobs? Who has the bigger impact on their respective company? Will Apple be slow to innovate without Jobs like the struggles Microsoft has had? Will Berkshire be able to get the same vulture-tastic deals without Buffett? I personally think AAPL is the better bet there as it has such a loyal customer base.
Speaking of vulture-tastic deals, how does this BAC deal compare? Obviously the 6% pales in comparison to the 10% GS deal. A deal so one-sided GS couldn't buy Buffett out quick enough. While Buffett reportedly is offering BAC a better deal because conditions are better, I don't buy it. I think it's a statement to the fact that there are fewer opportunities to get an equivalent return elsewhere. While the investment may be a vote of confidence that BAC isn't going bankrupt any time soon, I think it shows a lack of confidence in the future economic outlook.