1 Thing to Know About Warren Buffett’s Investment in Bank of America Corp

Many people know Warren Buffett's Berkshire Hathaway owns a big chunk of Bank of America, but it will surprise you how Buffett truly felt about the bank when he bought into it.

Jun 2, 2014 at 7:00AM


Bank of America (NYSE:BAC) looked like it almost wouldn't have survived without the $5 billion investment from Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) in 2011. But according to the CEO's of both companies, that's not true at all.


The tumultuous times
Many people know through Berkshire Hathaway, Warren Buffett has a $5.25 billion position in Bank of America's preferred stock that pays him a 6% dividend each year as well as the option to buy 700 million shares of Bank of America for $5 billion.

And many also know the initial investment came in 2011 as questions swirled about whether or not Bank of America would continue to simply exist. Just two weeks before the announcement Bank of America's shares plummeted more than 20% in a single day as fears about its future were stoked following the news of another lawsuit coming through.  

Forbes even ran a story titled, "Wall Street's Rumor Of The Day: JPMorgan Taking Over Bank Of America." And through the first 23 days in August, the stock price at Bank of America fell a staggering 36% to $6.30 a share.

When Dealbook reported the $5 billion investment by Berkshire Hathaway in Bank of America, it declared it was "a vote of confidence for the beleaguered financial firm," and the New York Times had its own headline: "Buffett to Invest $5 Billion in Shaky Bank of America."

With all that in mind, it's easy to believe Buffett's investment was, in essence, a bailout of BofA, and without it, Bank of America would've ceased to exist.

Yet it turns out, that simply isn't true.


Brian Moynihan. Source: Bank of America

The truth
In a recent interview with Forbes magazine, Bank of America's CEO, Brian Moynihan, recalled how the investment from Berkshire Hathaway actually happened.

It turns out Buffett called him, and Moynihan insisted Bank of America wasn't in dire straits like the media suggested.

Was this arrogant pride? Utter confusion? Did Buffett have to explain Bank of America wouldn't exist without him and his billions?

Moynihan notes Buffett responded to his assertion "the bank didn't need Berkshire's money," by saying, "I know. I wouldn't be calling you if you did."

The key takeaway
Buffett's investment in Bank of America was not made out of need, but want. In investing, as with any financial decision, there is a critical difference between buying what is wanted versus what is needed.

If Bank of America needed the money from Buffett, it would've meant its management was shaky, its business was floundering, and its future was truly in question.


Things are looking up at Bank of America.

But instead with Buffett wanting a position in Bank of America -- remember, he initiated the conversation -- it means he trusted its management, recognized the success of its businesses, and was optimistic about its future. Buffett believed he would benefit more from holding Bank of America than it would benefit from him.

Berkshire Hathaway can buy 700 million shares of Bank of America for $7.14 each. But even when he would've made a nearly $6 billion profit at the end of last year, he reminded us he can hold onto the option until September 2021, and he plans to do so.

Buffett told us in his most recent letter that "it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly."

Despite what these two says, the investment still may have been something Bank of America needed, but it was also something Buffett wanted.

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Patrick Morris owns shares of Bank of America and Berkshire Hathaway. The Motley Fool recommends Bank of America and Berkshire Hathaway. The Motley Fool owns shares of Bank of America and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

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I love the exercise, because it makes you think about what's important and forces you to be succinct.

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Everything else is details. 

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