Warren Buffett may do no wrong in the eyes of investors, but you certainly can by following in his footsteps.
The simple fact of the matter is that he can act on a scale that only a very small handful of people can match.
If you need any proof, just look at the terms of his 2011 deal with Bank of America. Buffett dropped $5 billion on the company.
He locked down a 6% annual dividend and an option to buy an additional 700 million shares at $7.14 each.
At the time, you could have bought in with a 0.2% yield and collect 1.16% today, making Buffett’s dividend 2,900% better then, and 417% better today.
Add in the fact that Bank of America shares are trading at $17.26 as I write this, and Buffett could create a 141.7% immediate gain.
This is great news for Buffett and Berkshire Hathaway, but this profit potential is locked into a $200,000 per share, $340 billion company.
So unless you want to sell your house for a single share, pay no attention to Uncle Warren’s latest move.
Don’t buy shares of car dealerships. Here is why…
Warren Buffett, Car Salesman
For those that haven’t heard the news, Buffett is buying the Van Tuyl Group. With 78 dealerships and an estimated worth of $8 billion, it is (or was) the biggest private dealership company in the nation.
As with all things Buffett does, investors quickly followed suit by buying shares of the major publicly held dealership companies, as if to front run him.
Check out the two-tiered rise formed by investors as the market opened Thursday and Friday. AutoNation Inc. also had strong quarter for sales, which was announced Thursday.
No doubt, they were egged on by Buffett stating, “I fully expect we’ll buy a lot more auto dealerships over time,” in a CNBC interview, and that Berkshire Hathaway would use the company as a platform to make an even bigger move into the market.
To put it bluntly, this was an uninformed knee-jerk reaction, and one that was horribly shortsighted.
While details emerged just last week about the deal, we know nothing about the terms. Here is what these copycat investors may not have considered:
1. We have no idea what terms were involved in the deal, and Buffett could have gotten a sweet deal that cannot be replicated at fair valuations in the stock market.
2. The deal was in the works, undoubtedly on-and-off, for seven years. This thing dates back to the halcyon days when credit flowed like wine and the economy was one giant bacchanalian orgy.
3. AutoNation is the largest public dealership company with over 270 dealerships out of the 17,000 in the nation. Pursuing acquisitions in this kind of market means sticking to private dealerships, not publicly traded ones.
Trying to front run future Berkshire Hathaway purchases is a terrible idea. Pumping up dealership stock prices will only persuade Berkshire Hathaway to find deals elsewhere, if they would even consider buying a publicly traded company at all.
Headwinds
Then there is everything working against dealerships as a whole. There is a lot of uncertainty ahead and signs of reduced revenue potential:
1. Sales have likely peaked around 16 to 17 million per year. There is far less slack to recover compared to previous years where people delayed purchases.
2. Credit for car purchases is getting sketchy. Over 30% of new financing is subprime. The FTC is starting to look into fairness in collections and loan servicing.
3. Online lead generation and matchmaking platforms, such as TrueCar and CarsDirect, are eroding profit margins as consumers have far more data on price comparisons available.
4. Tesla, with a complete lack of franchised dealerships, is directly challenging the laws put in place by local and state “good ol’ boys” to protect the dealership model.
Plus, the bump to share prices for the dealership companies is in spite of a downward trend since early July. AutoNation is down nearly 10%, Penske is down nearly 12.5%, CarMax is down about 9.5%, and Sonic Automotive is down almost 4.5%.
The market is turning on them, and Buffett’s new purchase and plans have nothing to do with these companies. The bump in share prices will not alter this trend.
What Will Work For You
This is a classic example of his buy-and-hold forever technique. Buffett will build a unified business that benefits from a better scale of economy over the next couple decades by pursuing private dealerships with untapped potential.
It is simply a move that all of us and our lack of billions of dollars and infinite timespan cannot replicate. If you’re going to follow Buffett’s investments, you’ll need to consider what can, and cannot, work for you.
Forget what Buffett is doing now with dealerships and stick to what scales down to the size of your savings and investment funds. In fact, forget about all of his multi-billion dollar deals.
You can’t buy an $8 billion company, and you’ll never get guaranteed profits and unique dividend terms from corporate giants like Bank of America.
However, you can find deals on tried and true value dividend stocks outside the stock market on preferential terms, just like Buffett does, albeit on a smaller scale.
With a low cost of entry, no fees, and up to a 5% discount on the share prices, you can buy shares of companies Buffett holds. It is what made Buffett a household name, and what has helped millions of investors build their wealth.
