About three weeks ago I was asked a question out of the blue that caught me by surprise because it came from someone I didn't know very well--- if you could take a flier on just one investment right now what would it be?
While I hesitated, my father-in-law who was with me piped up with his suggestion of gold. His justification was in part the already large run up in price, the Fed's easy money policy, the poisonous political environment and that gold is real money, not a fiat currency. I didn't debate him on his points, but stated it wasn't my style to buy things so close to their all-time highs.
My style is to take a flier on something that seems to be universally hated because the upside potential is much greater. So I piped up with Bank of American, which everyone hated at the time, and still seems to. I heard the groans right after I mentioned the name, and got the abrupt: "Really, aren't they going under?" I knew this person was going to be buying gold soon, and will probably get caught in the coming gold correction within the next year or two.
At the time, BAC was selling at close to 6 bucks a share, with major challenges in every line of business and despised by most investment professionals, some who joking called it "Dead Bank Walking." The situation couldn't be better for making an investment in their great collection of assets. Pessimism was running high; rumors of demise were all over the news media. Perfect flier territory.
Then came the Buffett deal, where the Oracle purchased some preferred and options to buy common at fire sale prices. The management of BAC have a history of negotiating bad deals that penalize shareholders, and this is another one of those deals. The Wall Street Journal, and a number of blogs such as MoneyCone and DIY-Investor have warned folks not to blindly follow Buffett into this deal by looking at the results of investing in common on his other deals of the past three years. It isn't a pretty picture, and no one knows, not even Warren, the true financial condition of BAC after buying Countrywide and Merrill.
My guess is that in five years BAC common will either be at 0 or the mid-twenties. Banks can recover amazing fast when the tide turns on the housing market. Is it worth plunking down $1200 bucks for a return that could either be 0 or $4800 or somewhere in between. No one can predict the future, and you'll have to make that decision for yourself. Me, I'd be inclined to throw a little crazy money into BAC betting on a three, four or five bagger not because of the Buffett investment, but because of the extreme pessimism surrounding the stock.
If you could take a flier on just one investment what would it be?
Disclosure: The Grouch does have a small, speculative position in BAC taken before Buffett negotiated his preferred deal.