There’s no doubt in anyone’s mind that Warren Buffett is the true master when it comes to the stock market. The billionaire is known for his long term approach, buying stock from companies he sees potential in.
In a letter to his shareholders over two decades ago (Buffett is CEO at Berkshire Hathaway), he advised them that if they didn’t care about owning a particular stock in 10 years, then it wasn’t worth owning even for ten minutes.
His investment decisions are also not influenced by current events, and neither does a volatile market cause him sleepless nights. He trusts his gut, and since he is the third richest man alive, we must admit that he’s got very good entrepreneurial instincts.
The CEO is also known for going in big as evidenced by the almost $1 billion worth of Amazon shares he owns. To be exact, they are worth $900,000, but who’s to say he won’t acquire more worth $100,000?
Backing Occidental Petroleum
If you’ve been keeping up with the billionaire, you should know of his latest investment. Warren Buffett has just bought preferred stock worth $10 billion, backing the bid from Occidental Petroleum for Anadarko. Buffett’s Berkshire Hathaway bought 100,000 shares, translating to an annual 8% dividend.
Preferred stock is different from common shares, and the latter is what most of us know of. Although they are both equity, the former pays higher dividends. The current interest environment makes preferred shares quite attractive, and any move that Buffett makes can be trusted as being the correct one, at least in his opinion.
The question is, therefore, when best should a person looking to invest follow the CEO’s footsteps? According to Blue Ocean Global Wealth’s CEO Marguerita Cheng, you can acquire preferred stock if you have extra capital lying around, you intend on a long time commitment, and one that meets the objectives you set out before investing. As in any investment, however, there are both advantages and quite risky drawbacks.
Advantages – and disadvantages
If the goal is consistency in dividends, then preferred shares are the way to go. The fact that they pay higher than common stock is also another lucrative incentive. However, Colin Gerrety (a financial planner) says that the investment is not as safe as if you invested via traditional bonds.
Also, dividends aren’t guaranteed. Just as is the case with common stock, dividends from preferred shares are drawn from the company’s profits. If it operates at a loss during a fiscal year, no dividends are paid out.
According to financial experts, the biggest risk preferred shares have is their sensitivity to interest rate changes. The two have an inverse relationship – an increase in interest rates makes preferred shares less attractive, and they, therefore, go for lower prices.
When it comes to voting rights, this is a recluse of common shareholders. Those who own preferred stock have no say in, for example, selecting the company’s directors. However, preferred shareholders enjoy a tax benefit in the form of qualified rates on their dividends instead of their earnings being treated similarly to ordinary income.
