Why Does Warren Buffett Own BAC Stock?
When Warren Buffett bought $5.0 billion worth of shares in Bank of America Corp (NYSE:BAC), it raised a lot of eyebrows. It was in 2011, just three years after the financial crisis, and investors were still wary of BAC stock.
They were skeptical about all financials, but Bank of America was a special case. After all, the company had adopted a ton of risky loans when it bought Merrill Lynch and Countrywide Financial. The downside risk was gargantuan.
Most investors were too scared to see the logic of Buffett’s move. I remember it well. Every article you read and every investor you met said the U.S. economy could fall back into recession. They were unified in fear.
But moments of fear are when Warren Buffett thrives. He always says, “Be fearful when others are greedy, and greedy when others are fearful.”
Four years later, Buffett had doubled his money on the capital gains alone. That’s not even including the enormous six-percent dividend payout he was getting for his preferred shares. The “Oracle of Omaha” proved his genius once again.
Even so, the start of 2016 hasn’t been kind to the banking industry. BAC stock is down more that 15%, prompting many to ask if it’s time to dump BAC stock, prompting many to ask if it’s time to leave Bank of America behind.
A Legend vs. the Bear Market
So should investors join the bears on this one? To put it mildly, no. I find it unbelievable that so many investors still don’t get it. They know that moments of fear are the opportunity to find stocks at a discount. But they don’t know how to overcome the fear.
If Bank of America’s stock trade at a discount, that’s a good thing! I’m not saying there are no legitimate reasons to dump a bank stock. Lord knows the big banks have given us cause to doubt them. However, the recent pullback doesn’t look specific to BAC stock.
The NASDAQ Composite, for instance, has dropped more than 13.0% since the start of 2016. Concerns about China’s slowing growth rate were weighing heavy on capital markets. There was a broad market sell-off.
It had very little to do with BAC stock specifically. Investors are just concerned that financials would get hit before everyone else. But I would remind you that fear didn’t stop Buffett from making a boatload of cash.
When he picked up $5.0 billion worth of BAC stock, he also got a special deal. Because, you know, he’s Warren Buffett. They gave warrants, which allowed him to buy 700 million shares of Bank of America at a strike price of $7.14.