By DAVID MOON, Moon Capital Management
If there was anyone who could sell a weird investment in this economic
environment, it is Warren Buffett.
With Wall Street's recent record of 3.7 scandals per day, it is easy to look
elsewhere for investment opportunities. But with interest rates so low,
it's hard to get excited about buying bonds.
How far would interest rates have to drop before you finally quit buying CDs
or bonds? Are you frustrated with money market fund yields below two
percent? Would you be willing to invest in a bond that pays as little as
one half percent?
How about this? Would you invest in a bond that required you to pay
interest, rather than receive it? You say someone would have to be crazy
to buy such a bond? Warren Buffett's Berkshire Hathaway just sold $400
million worth of these securities, each bond obligating the holder to pay Warren
three quarters of a percent interest per year for five years. Buffett
borrowed $400 million and the lenders are paying him interest.
In exchange for paying Berkshire three quarters of a percent a year, each
investor does have the right to purchase shares of Berkshire Hathaway common
stock. But the price at which they can buy the stock is fifteen percent
above Berkshire's current price. In effect, these securities are
old-fashion convertible bonds, with one twist: they pay negative interest.
In a press release, Buffett explained, 'despite the lack of a precedent, a
negative coupon security seemed possible in the present interest rate
environment.' That was an understatement. Berkshire initially
planned to raise only $250 million, but increased the size of the offering due
to strong demand.
Some investors are so concerned about traditional investments they are
willing to pay someone else for the right to buy a stock they could purchase at
a lower price in the open market. But it is not just any stock. It
is Warren Buffett's stock. The reason is confidence. WorldCom may go
bankrupt and Martha Stewart may not be who we thought she was. Our state
government might shut down and maybe that smooth talking guy at Michael's won't
respect you in the morning. But Warren Buffett is the gold standard of
investment trustworthiness. Years ago when Salomon Brothers' credibility
was questioned following a Treasury bond scandal, Salomon turned to its
shareholder and board member Buffett to restore credibility and
confidence. Is Wall Street looking to Buffett again?
I would love to have been a fly on the wall when Buffett hatched this
idea. 'Hey Charlie, I have an idea. Just listen to me. This
may sound crazy, but let's see if we can get people to pay us interest for
loaning us money. I bet we could get a couple hundred million
dollars. And it will be better than free; they'll pay us.' I'm sure
Guglielmo Marconi sounded crazy too, when he said he could send information
through the air, rather than on a wire. The really big ideas always sound
impossible. It is easy to underestimate the simple, yet enormous,
potential of honest genius.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).