Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Warren Buffett Should Consider SPAC Investing -- Here's Why

By Matthew Frankel, CFP® - Jan 10, 2021 at 6:13AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These "blank check" companies are a better fit for Buffett's style than you might think.

There has been a surge in popularity in special purpose acquisition companies (SPAC) recently. The idea of these so-called "blank check" companies isn't exactly new, but more SPACs went public and more funds were raised by these companies in 2020 than in the previous 10 years combined.

At first, SPAC investing might seem like a highly speculative type of investment. You're essentially buying a stock without knowing anything about the business you'll ultimately be buying, and there's a chance that no business combination will even take place at all. What's more, many of the types of businesses being taken public by SPACs, such as electric vehicle manufacturers and legalized gambling plays, are certainly speculative in nature.

However, there are two major characteristics of SPAC investing that would likely appeal very much to legendary value investor and CEO of Berkshire Hathaway ( BRK.A -1.17% )( BRK.B -1.25% ) Warren Buffett.

Warren Buffett smiling.

Image source: The Motley Fool.

Buffett loves putting his faith in good management

Berkshire Hathaway owns more than 60 subsidiary businesses, but Buffett and the rest of Berkshire's team have very little involvement with the day-to-day operations of any of them. This is because Buffett will not acquire a business that doesn't have a top-notch management team already in place.

It's difficult to overstate the value Buffett places on good management as part of his investment strategy. Buffett once said, "And so the important thing we do with managers, generally, is to find the .400 hitters and then not tell them how to swing." In other words, find the best managers in their respective businesses and let them do their thing.

Why this matters for SPAC investing

When you're investing in a SPAC that hasn't yet identified an acquisition target, you're essentially making a bet on that SPAC's management. For example, Chamath Palihapitiya's two remaining pre-deal SPACs, Social Capital Hedosophia Holdings IV ( IPOD 0.20% ) and Social Capital Hedosophia Holdings VI ( IPOF 0.10% ) trade at huge premiums because investors have enormous faith that he'll be able to replicate the success of his previous SPACs. When it comes to the world of "blank check" companies, calling Palihapitiya a .400 hitter simply doesn't do him justice.

The point is that with literally hundreds of SPACs in the market, and more going public each week, investors like Buffett (and you and I) can pick those whose managers have excellent track records and align with their interests.

Given Buffett's style, Bill Ackman's SPAC, Pershing Square Tontine Holdings ( PSTH 0.00% ) is one that immediately comes to mind. Not only is much of Ackman's investing style modeled after Buffett (Forbes magazine once actually called Ackman "Baby Buffett" in a 2015 cover story), but as the largest SPAC in history, it could actually prove to be a needle-moving possibility for Berkshire. https://www.businessinsider.com/forbes-think-bill-ackman-is-the-next-buffett-2015-5

Another reason Buffett might like the SPAC model

It's also worth mentioning that investing in a pre-deal SPAC offers a margin of safety, which is another concept Buffett loves to incorporate into investments. If you aren't familiar, Buffett explains this concept as such:

"On the margin of safety, which means, don't try and drive a 9,800-pound truck over a bridge that says it's, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds."

With SPACs, the margin of safety is twofold. If the SPAC's management announces an acquisition that shareholders don't like, they can vote against the business combination. And if the SPAC cannot find an acquisition target in the predetermined amount of time (typically two years), investors get their money back with interest.

Would Buffett actually invest in a SPAC?

To be clear, I'm not saying that Warren Buffett or any of Berkshire's stock-pickers are actually going to invest in a SPAC. And although there are hundreds of SPACs in the market, many are too small to be needle-movers for Berkshire. However, as we've seen here, SPAC investing has more in-line with Buffett's investment style than you might think.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$278.59 (-1.25%) $-3.53
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$420,285.01 (-1.17%) $-4,974.99
Pershing Square Tontine Holdings, Ltd. Stock Quote
Pershing Square Tontine Holdings, Ltd.
PSTH
$20.12 (0.00%) $0.00
Social Capital Hedosophia Holdings Corp. IV Stock Quote
Social Capital Hedosophia Holdings Corp. IV
IPOD
$10.25 (0.20%) $0.02
Social Capital Hedosophia Holdings Corp. VI Stock Quote
Social Capital Hedosophia Holdings Corp. VI
IPOF
$10.26 (0.10%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
673%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.