Anybody can feel like a great investor during the bull market. But when times turn tough, many investors look for guidance from the greats -- and Warren Buffett definitely qualifies in the top echelon of investing experts. The Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO has delivered strong results over a long career that dates back more than half a century, and he's put time on his side in turning his insurance company into a corporate empire.
Buffett has taken criticism over the years for his decision to carry so much cash in his portfolio. Yet rather than caving into popular opinion, the Oracle of Omaha is doubling down on his strategy by borrowing even more money. The fact that Berkshire is able to pay such low interest rates on debt is a contributing factor to Buffett's strategy working, but the fact is that even ordinary people like us are in a position in which we can follow the same strategy and look to cut our borrowing costs.
Look at the rates Buffett just got!
In late March, Berkshire Hathaway announced its plans to raise debt in a yen-denominated bond offering. Just last week, that offering got officially priced. The rates were truly amazing:
- On three-year notes, Berkshire will pay 0.674% to borrow about $520 million.
- Another $385 million in five-year notes will carry a 0.879% interest rate.
- Berkshire's rate on almost $270 million in seven-year notes will be just over 1%.
- 10-year notes yielding 1.11% will give Berkshire another $170 million.
- On the longer end, Berkshire will pay 1.585% to borrow $240 million in 20-year notes.
- Buffett is also borrowing $170 million in 30-year notes paying 1.779%.
- Finally, Berkshire is issuing $55 million in 40-year notes -- due in 2060! -- at 2%.
All told, that'll give Buffett another $1.8 billion to use for whatever purposes he sees fit. Add that to the $128 billion in cash Berkshire reported as of Dec. 31, and you can see that it's a small amount but incrementally adds to the insurance giant's war chest.
It's clear from Buffett's move that he believes rates are extremely attractive at current levels. Although he's never been a fan of market timing, it's probably fair to say that the Berkshire CEO isn't counting on these low rates lasting for long -- and he wants to strike while the iron is hot.
How regular investors can score a Buffett-like deal
Ordinary consumers also have an unusual opportunity to put low interest rates to good use. For instance, homeowners have a new opportunity to consider refinancing their mortgages:
- 30-year mortgage rates at 3.33% are down almost a full percentage point over the past year, and they're down by half just since the late 2000s.
- 15-year mortgages are available at even more attractive rates, averaging 2.74% in the most recent week according to Freddie Mac. That's in the same neighborhood as historically low rates in 2013 and 2016, and it's down more than a percentage point and a half from late 2018.
Interest rates on loans for other major purchases have also offered borrowers some relief. Auto loan rates haven't fallen as much as mortgage rates, for instance, but you can still get attractive financing from many lenders.
Even those who are comfortable with leveraged investing can find attractive terms. Although margin rates at many brokers remain at elevated levels of 5% to 10%, you can find some brokers that will offer margin rates as low as 0.75% to 1.55%.
Should you follow Buffett's strategy?
If you have significant amounts of debt, then taking steps to try to refinance at lower rates is a no-brainer for anybody. The only question is whether transactional fees like closing costs make refinancing efforts unprofitable, but in an ultra-competitive environment, you can probably find financial institutions willing to accommodate you.
Investing with leverage, however, is risky. Note that even though Berkshire is borrowing more money, it also has plenty of cash to pay off that debt anytime you want. That's a lot different from investing on margin and running the risk of having to face a margin call at the worst possible time if stocks fall from here. A minimal amount of margin debt tied to portfolio value isn't a bad thing, but the more you use margin, the greater the chance that you'll get yourself into trouble.
If there's one thing that Warren Buffett's latest cash-raising efforts show, it's that now's a good time to look for debt financing. As long as you're prudent with the money you borrow, you have an opportunity to put the credit markets on your side and get your finances into better shape. With today's uncertainty, that level of confidence is more important than ever.