In our Value Investing Course, we talk about options. Similar to options is an investment called Warrants. A Warrant gives the investor the right to buy shares of stock at a specified price for a set period of time. The difference between buying a call option vs. a warrant is that a long term call option, aka LEAPS, has a maximum expiration of two or two and a half years. Warrants can have expirations anywhere from 5 to 10 years, and some warrants don’t have an expiration date. They are called “perpetual” warrants. So why would anyone want to enter into an investment where they may not take over the shares for several years? Let’s take a look at what Warren Buffett did in 2011.
At that time, banks were still recovering from the subprime lending crisis of 2008. The government made the big banks go through a stress test to make sure they would remain solvent if we saw another crash like that one. Buffett realized that Bank of America had problems, as most value stocks do (that’s why they trade at a discount to fair value), but he knew that those issues would eventually be resolved. BOA is a solid company and all Buffett had to do was be patient. Instead of putting out the entire cash amount to buy the shares, he used leverage and only had to invest a fraction of the total cost to buy the shares through the use of warrants. Those warrants gave Buffett the right to buy 700 Million shares of BOA anytime between 2011 and a future expiration date that he selected for a price of just $7.14.
He knew Bank of America was worth a lot more than $7.14 and he was right. Very right! He just needed Mr. Market to correctly price BOA from the overly depressed price that is when bought the warrants. Today he exercised his right to convert his warrants into 700 million shares of stock at $7.14. As of today, BOA is trading at $23.84. That is almost a 12-BILLION-dollar profit.
If there is a company that you are looking at right now, if you feel like it will be worth a lot more several years from now, and you don’t want to invest the entire cash outlay to buy those shares, then warrants may be something to consider.
For more information on options trading, value investing, and warrants, give us a call at:
877-344-6141 to see if our Value Investing Course is right for you.