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Can you really invest like Warren Buffett?

Can you really invest like Warren Buffett?

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No.

Da man knows how to have some fun. Photo: Aaron Friedman

But can you dream about investing like Warren Buffett? Sure you can, but it will always come to just that: A dream.

Firstly, Buffett has extraordinary access that ordinary investors don’t.

Last week, in his latest deal, Buffett invested S$6 billion of Berkshire Hathaway’s money in Bank of America. (Buffett is the chairman and CEO of Berkshire Hathaway.)

The Bank of America deal started with a phone call from Buffett’s assistant to the office of Bank of America CEO Brian Moynihan last Wednesday.

Moynihan took the call and Buffett offered to make the investment.

Your average Bank of America shareholder wouldn’t have access to the CEO. Or even his assistant. (By Thursday morning, Bank of America‚Äôs trading floor in New York erupted with cheers of the news.)

Therefore, this isn’t an ordinary investment because an ordinary investor only gets to buy common stock.

Buffett’s S$6 billion is buying him 50,000 shares of a special class of so-called “preferred stock,” which will pay him a 6 percent dividend, or S$360 million a year.

In comparison, Bank of America’s common shareholders get a quarterly dividend of one cent a share. Therefore, if you owned S$6 billion of ordinary Bank of America common stock at its current price of about S$9.60 a share, you’d be getting a paltry S$30 million a year in dividends – less than 10 percent of what Buffett will get.

Moreover, Bank of America can buy back Buffett’s investment at any time for a 5 percent premium.

You could, however, get a bigger dividend by buying Bank of America’s preferred stock. But you couldn’t get the warrants, which are the best part of Buffett’s deal.

The warrants give Berkshire the right to buy 700 million shares of Bank of America stock at S$8.57 a share at any time over the next 10 years. Imagine if share prices were to rise significantly in the future, Berkshire will still be offered the stock at S$8.57 a share.

There are lots of ways to think about how much these warrants are worth, but the value is pegged at somewhere around S$3.6 billion. That’s S$3.6 billion that Bank of America handed Buffett.

And lastly, wherever Buffett invests, stock prices shoot up.

When news broke that Buffett had invested in Bank of America, the stock shot up more than 25 percent.

The Bank of America share is worth about $9.80 around this time, which means that the value of Buffett’s warrants have increased due to his own initial investment in the stock.

Regular investors, on the other hand, cannot confer any credibility upon any institution the way Buffett can.

Therefore, because Buffett can give a company something that ordinary investors can’t, he cannot be paid ordinarily as well.

Which is why you cannot invest like Buffett.

This article is a 60-reduction of the original published here on Aug. 30.