Value Investing / Main Index / previous / next

September, 2007


Banking on the country is a good bet too, but it is probably a little early to be investing yet in Countrywide. Both companies, Bank of America (BAC) and Countrywide Financial (CFC), have been beaten down in the current, and likely for awhile ongoing, subprime mortgage plus credit crunch scare, but, unlike the latter company, BAC remains in excellent financial condition.

Besides investor anxieties about their exposure to mortgage investment or credit risk, both companies also have in common that they have lately been reported in the mainstream press as purchase candidates by Berkshire Hathaway (BRK/A or BRK/B) CEO and legendary financial guru, Warren Buffett. Indeed, he has already recently bought several million shares of Bank of America stock, though each company, BOA and BRK, is huge, so a million shares here or there is not all that much in relative terms, Buffett's total reported accumulation just 0.2% of BOA's market capitalization, for instance.

But if Buffett actually follows this investment with a speculative toe into the Countrywide Financial waters, it may be a move the average person would not be wise to emulate. After all, he got BRK into silver commodity investing a few years ago and was also into U.S. dollar speculation around the same time. Yet these were hardly value plays in the traditional Benjamin Graham sense. BRK might have lost billions on the combined deals. So, not every step considered or taken by even a money guru is appropriate for the likes of most ordinary investing mortals.

In Bank of America, though, there seems to be reason to follow the great one's example. As of 1:00 PM (Central Time) on 9/18/07, BAC, one of the nation's strongest financial corporations, was selling for just under $50 a share, had a dividend of over 5% (with a dividend payout ratio safely below 0.5), and had a P/E of only about 10. Both its PEG and Price to Book Value ratios were reasonable to below average.

Even with as apparently secure a company as this, however, one may be well advised to proceed with caution, investing a little at first and following with periodic investments in the months ahead. After all, the stock market can sometimes depress with irrational panic at least as much as it brings joy in periods of "irrational exuberance."

It seems unlikely the Wall Street concerns over subprime lending, reduced overall credit, poor real estate markets, consumer worries, or the next recession will end with simply one or two Federal Reserve rate cuts. Then too, there are major wildcards out there that could affect equities, like the possibility of war with Iran, a collapse of the current Iraqi government, a big further fall in the value of the dollar, or a new terrorist attack on our shores, to mention a few.

One can hardly do better than investing in a well managed American company that provides a 5% dividend, but, all things considered, it also is wise to play it safe.

Source: Buffett's Secret. Laszlo Birinyi, Jr., in Forbes, Vol. 180, No. 6, page 106; October 1, 2007.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

Value Investing / Main Index / previous / next