Investing_as_the_Oracle_of_Omaha

Investing as the “Oracle of Omaha” MGT521 September 30, 2011 Investing as the “Oracle of Omaha Despite a weak economic climate, and the unreliable assets held by banking institutions, Bank of America maintains its position as the largest banking institution making notable business decisions that has positioned them as an attractive investment opportunity. “Financial managers examine financial data and recommend strategies for improving financial performance” (Nickels, McHugh, & McHugh, 2010, p. X). In deciding on whether to invest in Bank of America, a competent mutual fund manager would conduct a Strengths, Weaknesses, Opportunities, and Threats Analysis (SWOT). The SWOT analysis will focus on key factors to consider before investing in Bank of America. Figure 1.1 SWOT Analysis for Bank of America According to the SWOT analysis for Bank of America (Figure 1.1), has experienced a loss in their stock prices, but the company has also seen “shares are up about 12 percent” (Renee, 2011, p. X). An investor must “study the stock market, annual reports, recent investments, and future potential earnings” (Noel, 2011, p. 10) of any given company positioned as a recommended investment opportunity. The annual report can reveal details about the company that will ultimately determine if the company is a sound investment. However, annual reports are often written to enhance the image of a company and applying necessary precautions or simply using common sense to separate embellishments from facts. Strengths for Bank of America Bank of America has strengths closely scrutinized by investors, while the weaknesses must be explored closely to ensure these do not have the possibility of affecting corporate assets and further jeopardizing investing opportunities. “Like most banks, Bank of America saw bad loans increase during the fourth quarter. Charge-offs rose 39%, to about $1.1 billion, including a $210 million charge to write down secured and unsecured loans. The ratio of charge-offs to total loans leaped to 1.07% from 0.81% in the third quarter” (Boraks, 2011, p. X). Bank of America has certainly seen its fair share of losses, and with an economic environment in turmoil, banks are subject to fears in the market as well as deep scrutiny. Bank of America certainly has struggled to maintain its relevance within an uncertain volatile climate, “earnings per share were $1.28, up from 85 cents a year ago and 4 cents better than the consensus estimate of analysts polled by Thomson Financial/First Call. Revenues rose 5% for the year, to $35 billion” (Boraks, 2011, p. X). Weaknesses in Housing affect Bank of America The housing crisis has been a weakness blamed for most of the financial collapse in recent years and stands as one of the most alarming signs to refrain from investing in banks today. “Bank of America, based in Charlotte, holds $408 billion of mortgages and home-equity lines. Its home-loan division has lost more than $15 billion since the 2008 acquisition of Countrywide Financial, the biggest mortgage lender during the housing bubble. Concern that those costs will swell has hurt shares of BofA, the largest U.S. lender by assets and the biggest servicer of mortgages” (Son, 2011, p. X). As the economy continues to lag and struggle in its recovery, investors continue to be increasingly skeptical of banks holding bad loans, but hopeful signs are slowly beginning to change their minds. “While Bank of America does not disclose its home price forecast, spokesman Jerry Dubrowski says it is "close" to the average 1.4 percent decline predicted by 111 economists surveyed by research firm MacroMarkets. Neil Cotty, the bank's chief accounting officer, said on an April 15 conference call with analysts that home prices may begin a "gradual improvement over the second half" (Son, 2011, p. X) that increases the appeal to invest. While “other banks expect home prices to drop and are selling bad mortgages, Citigroup, the third-largest bank by assets, sold $1.1 billion in delinquent mortgages in the first quarter because the New York-based firm sees "downward pressure" on prices this year, Treasurer Eric Aboaf said on April 27” (Son, 2011, p. 47). Predictions concerning values have indicated the bottom for the housing market is still uncertain, but unless investors expect a total collapse and lose faith altogether, predictions also suggest the housing market will eventually rebound and gains will be substantial, turning these investments into desirable opportunities. “In the case of Bank of America, not only is it heavily exposed to the housing crisis (it still has billions of dollars of bad mortgage debt on its books). Bank of America is also struggling to integrate some big acquisitions from recent years, notably Merrill Lynch and Countrywide Financial” (Son, 2011, p. 47). An investor must believe markets headed towards a rebound and regain confidence in the system will continue attracting investments. No investor knows or does this better than Warren Buffet, also known as the Oracle of Omaha, for his wise investments and multibillion dollar net worth that often graces the top of the lists of the richest citizens in America (Mclean, 2011, p. 37). The “Oracle of Omaha” to the Rescue “Warren Buffett has just given the country's largest bank a $5 billion vote of confidence. Bank of America's share price had been sliding in recent weeks. Investors were worried about its finances and whether it had enough capital to meet global standards.” Buffett’s investment not only gave Bank of America the confidence it needed to attract investments, but it also saved the company from possibly defaulting in their commitments. “The CEO at Bank of America said it did, but investors were not reassured until Buffett came to the rescue with his wallet. Buffett announced that his conglomerate, Berkshire Hathaway, is investing $5 billion in Bank of America and will receive 50,000 shares of preferred stock” (Renee, 2011, p. X). This investment represents not only a huge gain for Bank of America, but it also peaks the interest of investors, who respect any move the “Oracle” makes. Buffett is known for making successful business decisions, even when these include considerable risks. In the game of investments, everything is a gamble, where each player risks assets in hopes of gaining the highest returns. As “the world’s greatest stock market investor” (Renee, 2011, p. x), Buffett has a tremendous amount of influence that investors gravitate toward. However, even Buffett cannot calm the nerves of those investors worried over the housing market. This fear leads investors to turn to other sources for solutions. Enter the United States government, pressured to help homeowners, currently underwater with their mortgages, to avoid another housing market catastrophe. “While 51% of Americans feel government aid to help distressed homeowners make their mortgage payments is "unfair," 59% feel it is necessary, and 60% believe it will make the housing market at least a little better” (Noel, 2011, p. 10). The government, tasked with correcting the housing problem, implements programs to assist homeowners pay mortgages on time, which directly assists banks currently struggle to collect payments. “Launched in October 2008, the program was designed to help homeowners who owe more on their properties than they are worth. The Hope for Homeowners Program has helped homeowners struggling to repay their loans. David Stevens, the FHA commissioner, did not provide details on possible changes, but did say it could be expanded to more directly help borrowers with negative equity” (Noel, 2011, p. 10). Government Aid and Job Cuts The aid provided by the government is essential to combating the struggling economy, especially when the country is under threat of a possible reemerging recession. Another recession will directly affect jobs; an uncertainty that has led investors to refrain from taking more aggressive risks, as the job market will likely undergo yet another massive displacement of employees. Consumers have refrained from spending in direct response to fears of losing their own job. Investors are well aware of this fear and understand the repercussions of another recession that stands to undermine the progress to rise from the verge of a total collapse. Investors alarmed by a recent announcement of massive layoffs at Bank of America may find comfort in knowing these will put the company in a better financial position. “Bank of America will cut about 30,000 jobs over the next few years in a bid to save $5 billion per year,” (Son, 2011, p. 47) matching the investment made by Buffett, further improving their financial standing and investing appeal. The problem with layoffs comes in the form of the employees, who lose their jobs and are unlikely, able to secure alternate employment with equal pay, thus leading them to default on their financial obligations including the loans held by their former employer. In other words, these employees will contribute to the overwhelming problem of high unemployment and eventually fail to meet debts, unless they find comparable employment with a similar or higher salary. Investors must consider, not only the financial gains Bank of America stands to benefit from the decision to displace thousands and thousands of employees, but also the negative impacts this decision will have on the economy. “The latest job cuts will lead to a 10 percent reduction in the bank's workforce of 288,000; the cuts come on top of 6,000 positions the bank has already eliminated through the third quarter of this year” (Son, 2011, p. 48). In an economy already suffering from unemployment, investors must consider the effects of rising unemployment and underpaid employees, who currently work in new entry-level positions, as companies are more likely to promote from within, rather than hire new employees to fulfill roles in some of their higher salaried positions. As an investor, these alarming threats suggest increasing research efforts and closely monitoring stock market trends. In the world of investing, everyone knows the formula to successful investments stem from “buying low and selling high.” Investor’s Golden Rule: Buy Low and Sell High “Bank of America stock was up 2 cents at $7 at midday. The stock has lost half its value this year, largely over problems related to poorly-written mortgages it acquired with its 2008 purchase of Countrywide Financial Corp” (Son, 2011, p. 48). An investor must ask whether or not the stocks have reached the lowest point, but be cognizant that the lowest point is always an unknown number. Investors must also consider impending lawsuits, as “the bank ‘also’ faces lawsuits from investors and regulators over the sales of mortgage-backed securities that lost value after the housing boom collapsed” (Son, 2011, p. 48). Warren Buffett once said of American Express, “they have the best tier of customers, but they also have the worst, who do not pay” (Mclean, 2011, p. 37). Buffett still remains as a major stockholder of American Express shares, as he understands the company continues consistently to turn profits every quarter. Bank of America, in comparison, had “a net loss of $8.8 billion, or $0.90 per diluted share, for the second quarter of 2011, compared with net income of $3.1 billion, or $0.27 per diluted share, in the year-ago period” (Stitt, 2011, p. X). According to the Second Quarter report for Bank of America losses were substantial, but this fact did not make Buffett refrain from investing, and neither should investors. Conclusion Bank of America is still the largest bank in America, and although they hold a series of bad loans, they also hold assets that make them an attractive investment. Most people today are criticizing Buffett for his position on lower tax rates for millionaires. Investors ignore popular views and would decide to invest in Bank of America as the “Oracle of Omaha” has because they believe in the formulas that have made Buffett one of the most successful leaders in America. Despite a weak economic climate, and the unreliable assets held by banking institutions, Bank of America maintains its position as the largest banking institution making notable business decisions that has positioned them as an attractive investment opportunity. References Boraks, D. (2002). At B of A, High Profits But Low Expectations. (cover story). American Banker, 167(15), 1. Retrieved from EBSCOhost. Mclean, B. (2011). Mr. Warren’s Confession. Vanity Fair, (606), 108. Retrieved from EBSCOhost. Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2010). Understanding Business (9th ed.). New York, NY: McGraw-Hill Company. Noel, W. (2011). Time to take stock of money. Gympie Times. p. 10. Retrieved from EBSCOhost. Renee, M. (2011). Buffett Gives Bank Of America $5 Billion Boost. Morning Edition (NPR), Retrieved from EBSCOhost. Son, H. (2011). Bank of America’s Hopeful Housing View. Bloomberg Businessweek, (4229), 47-48. Retrieved from EBSCOhost. Stitt, K. (2011). Bank of America Reports Second-Quarter 2011 Financial Results. Retrieved from http://mediaroom.bankofamerica.com/phoenix.zhtml'c=234503&p=irol-newsArticle&ID=1586315&highlight=