Warren Buffett is Lying to You

Bank Gains from Hidden Billionaires

Written by Jimmy Mengel
Posted October 21, 2013

Love him or loathe him, when Warren Buffett speaks, we are all ears.

The man can move markets with a sound bite. He can turn financial tides with a simple quip. As the world's most famous investor, that's how powerful he is.

But as an individual investor, can you do the exact same thing?

Uncle Warren says, "Yes, you can!”

"In terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period," Buffett told the Wall Street Journal last week.

Berkshire made over $10 billion by buying up companies that were in dire straights during the financial crisis, banking gains of up to 40%.

Could mom-and-pop investors really expect the same kind of returns?

Let's take a look at a couple of those positions today and see exactly how Buffett actually made those billions...

General Electric

In 2009, Buffett made a $3 billion investment in GE, which propped up the struggling beast while the rest of Wall Street went to hell in a handbasket.

For his $3 billion, Uncle Warren got a lot more than just stock in the company.

The deal he struck had the following provisions:

  • GE would guarantee Buffett a 10% repayment premium ($300 million) in addition to paying back the $3 billion he loaned — quite the cherry on top.

  • GE promised Buffett a 10% dividend every year (another $300 million a year). All told, Buffett will cash in on $900 million in dividend payments!

  • GE also gave Buffett warrants to buy another 134.8 million shares of GE stock at $22.25 each. Now that the company is trading at over $24, that's yet another way he's profiting where individual investors like us have no chance.

Obviously, as investors, we've come to expect an uneven playing field.

What's more, none of Buffett's gains would have been possible without that $3 billion loan.

So to say you and I could have done just as well is total fluff.

Goldman Sachs

Goldman was hit hard during the crisis (not least because they had a big hand in creating it, a story for another time). While Goldman was drowning, Uncle Warren came to the rescue and threw them a lifeline of $5 billion in cold, hard cash. But he wasn't just buying Goldman stock, like you or I could have easily done...

No, Buffett's deal was chock-full of juicy perks and sweeteners:

  • Goldman guaranteed Buffett preferred-stock with accompanying dividends that reached $500 million a year. For those who aren't familiar, preferred-stock dividends must be paid out before dividends to common stockholders — yet another leg up on Joe the investor.

  • As part of the deal, Berkshire was given warrants to buy 43.5 million Goldman shares at $115 a share; however, they later restructured that deal to give Buffett shares instead of cash.

    From Nasdaq.com

In March 2013, the two parties amended the deal from a cash settlement to a net share settlement. In other words, instead of giving Berkshire Hathaway the right to purchase 43,478,260 shares at an exercise price of $115 before Oct. 1, 2013, Goldman would instead give him the number of shares equal to the value to the difference between the average closing price of the 10 trading days leading up to Oct. 1, 2013 and the exercise price multiplied by the 43,478,260 shares the warrants granted.

This stake was smaller than it would have been in the initial deal, but did not require Buffett to spend any money to exercise the warrants. As disclosed on Oct. 8, the stake given in the amended deal totaled about 13.06 million shares, making Berkshire the six-largest external shareholder in the company.

In 2011, Goldman redeemed another 50,000 shares of preferred stock with a 10% cumulative dividend at a price of $110,000 per share that Berkshire purchased concurrently with the warrants. Goldman paid Buffett $1.64 billion in one-time preferred dividends at the time of redemption.

That's around $2.15 billion worth of Goldman stock!

Not a bad investment, to be sure — but one that you or I had a snowball's chance in hell of making.

Now, my point is not to discredit Buffett. On the contrary. As you can clearly see by these deals, there is a damn good reason the man is considered the best investor ever.

Needless to say, any individual investors would love to bank any of those gains. However, it's not as easy as following the Oracle from Omaha's lead in the hopes of making that kind of loot...

I have a little secret for you: Warren is actually right. You can do as well in the stock market as billionaire investors do — but not by simply following Berkshire Hathaway.

Every investor out there reads Warren's shareholder letters. They listen with bated breath to his TV appearances and carefully comb his op-eds in national papers. But you aren't at any kind of advantage if you are flooding the gates and buying up everything Buffett tells you to... There are simply too many people doing exactly the same thing, acting on his every whim.

The key is to dig into the portfolios of big-time investors that purposefully keep quiet, and stay out of the media limelight.

These guys have made a fortune from their investments — and from charging hefty fees for their advice. One of them, for example, charges an annual fee of 3% of assets plus 50% of profits. And they only take clients who are worth more than $1 million or have earned more than $200,000 in each of the last two years.

We have been able to tap into a secret Wall Street document that, unlike Berkshire's public portfolio, 99% of investors have never heard of...

By poring over these secret documents, I've been able to uncover three huge bets that some little-known billionaires are making at this very moment.

You can use this document to piggyback the best picks from these elite investors for steady and solid gains, year after year.

Sign up to Outsiders Club and check your email box for details.

Jimmy Mengel

Jimmy Mengel

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