I Love You, Warren Buffet

Sometime around 1980, can't remember exactly, there was a flight of money from many countries to Switzerland. The clock makers had so much money pouring in that the banks took interest rates to zero and even for a period of time were actually making you pay ½% interest to them to put your money in their banks. Yes, it actually happened because people believed their money was going to be safe there. It was.

Warren Buffett recently sold some convertible debentures - about $400 million. These are bonds that can be converted into shares of stock in the same company, namely Berkshire Hathaway (BRKA). Mr. B said the money was to be used for general purposes and possible acquisitions. Their statement indicates they have plenty of money now, but Warren is very good at buying companies that are in trouble.

What Warren has done has never been done to the American investor before or at least I haven't heard of it. The bond portion of the offering only pays 3% interest. Not much, but Berkshire Hathaway has an excellent history of making money so investors would rather have 3% for sure than 5% of maybe not getting their money with another company. But here is the kicker that sets Mr. B apart from anyone else. Along with the debenture come a warrant. A warrant in this instance is like an option to buy additional shares - nothing new here. If you want to keep the warrant active you must pay Berkshire Hathaway 3 ¾ % interest.

The warrant is convertible into the stock of Berkshire Hathaway at a price 15% higher than the price on May 21, 2002, about $78,000. The stock has to go up to $89,700 to break even. In other words you are giving Mr. Buffet say $100,000 for which he is paying you 3%, $3,000 annually, and in turn to keep the warrant you are then paying him 3 ¾%, $3,750 annually. He is using your money until the year 2007. Wow! What a deal - for him. The reason Warren can get away with this is that he has a great reputation for making money. If, and that is a big "if" in this bear market, the stock of Berkshire does go up you will be able buy it at a real bargain. That is the reason you are paying the premium. Today's Price/Earnings ratio is 101 and the S&P Index is 41. What will the P/E and price of Berkshire be if the P/E of the S&P goes to 17?

Mr. Buffett himself has said we are going to have to be very astute to make 5% in the market over the next 7 or 8 years. Any stock in a bear market is like a ship that is in the water. When the tide goes out all the boats go down. This is a bet that investors believe Warren can beat the bear. He thinks we are in for a long-term bear from which he can't help but profit because he will not have to pay off the warrants.

It is hard to believe anyone who is an astute investor would buy this; however, the offering was oversubscribed. Warren Buffet you are a genius.

Al Thomas' best selling book, "If It Doesn'tGo Up, Don't Buy It!" has helped thousandsof people make money and keep their profits withhis simple 2-step method. Read the first chapterto receive his market letter for 3 months atwww.mutualfundmagic.com to discover why he'sthe man that Wall Street does not want you toknow.

Comments to al@mutualfundmagic.com

Copyright Albert W. Thomas All rights reserved.

Washington Post-ABC News poll Washington Post, United States - 22 hours ago This Washington Post-ABC News poll was conducted by telephone October 8-11, 2008, among a random national sample of 1101 adults, including additional ...

Crisis may spawn big US wealth transfer moves Reuters - 3 hours ago The wealthy use trusts to pass on stocks, mutual funds and physical assets such as real estate. The tax rates for such transfers are linked to interest ...

Anxious investors hanging on despite heavy stock market losses Los Angeles Times, CA - 19 hours ago ... have about half a million dollars in the market, including retirement savings, individual stocks, mutual funds and money market accounts. ...

Siglo21

The financial crisis and the candidates Siglo21, MA - 10 hours ago ... since the financial crisis has entered a unexplored and terrifying ground, in which the value of almost all goods-houses, stocks, mutual funds, ...

Government should stay within our means Myrtle Beach Sun News, SC - 21 hours ago Our stock markets are going in the toilet, and the retirees who rely on stocks, mutual funds and 401(k) income are hurting. Rather than asking how did we ...

Course explores 'Investing for Income' Independent Press, NJ - Oct 12, 2008 We will explore bonds, high dividend paying stocks, mutual funds making generous distributions and a host of other income-producing investments."

Following the stock market is no game Stamford Advocate, CT - Oct 11, 2008 The class focuses on educating students about stocks, mutual funds and bonds. Reid says her aim is to teach students to invest early and responsibly. ...

Earning the Boy Scouts' personal management badge Forbes, NY - Oct 10, 2008 _Explain the advantages and disadvantages of putting money into the following: stocks, mutual funds, CDs, bonds, savings accounts. ...

Our View — Let free market be free Mankato Free Press, MN - Oct 11, 2008 Why not require the same thing with stocks, mutual funds and other investment instruments? It would be less costly than the current bailout. ...

Financial Q&A: Why it's best to seek legal advice when selling land Christian Science Monitor, MA - Oct 5, 2008 This time, he would consider investments with a higher return potential, such as individual stocks, mutual funds, or ETFs (exchange traded funds). ...