The lure of Wall Street bargain hunting

Although I never intended for this blog to be a series of “how to” tips, I find myself wanting to pass on some insights about money, investing and how people who live in the world of money think about investing. I am not a financial guru and my inclination is always to distrust advice if it is repeated over and over again and if the advice is likely to benefit the advice-giver in the short term and the advice-taker only in the long term.

One piece of advice that I hear over and over these days is some variation on “Time to bargain hunt on the stock market”. The second most frequent piece of advice is, “Hold on to your investments for the long haul.”

The first of these two popular slogans comes from a variety of sources, including multi-billionaire Warren Buffett. Some people seem to believe that if Warren Buffett thinks it is a good time to go bargain hunting on Wall Street then it must be a good time for all of us to get out there and buy stocks.

Unfortunately, following Buffett’s advice will more than likely lead many small investors to lose what little shirt they have left. Here’s why.

Buffett, the financial genius behind Berkshire Hathaway, the investment company whose shares are worth well over one hundred thousand dollars each, has the financial muscle to purchase preferred stock at a 15% discount. So, Warren Buffett is purchasing the class of stock that is paid off first after debt if the company goes bankrupt. Common stockholders are paid last if the company goes bankrupt. He is also paying less for that premium stock than you will pay for the same stock. Also remember that preferred stock pays a guaranteed dividend whereas the common stock dividend is variable and is not guaranteed. For this reason some people classify preferred stock as debt since the company is required to pay the yearly dividend. The company also has the option of “calling” or purchasing back preferred stock, usually at a premium.

Along with the usual advantages that accrue to preferred stock shareholders, companies can also create special classes of stock with special privileges, such as 10 votes per share as opposed to the common stock voting privilege of one vote per share. My guess is that Buffett is frequently the beneficiary of these special classes of stock given the financial muscle represented by Berkshire Hathaway.

So what about the second piece of advice: Hold on for the long haul? That may depend on what stocks you own. We are in a highly volatile time of enormous change. Read, learn all you can about the investment climate and make your decisions based on solid research. Do not hold on simply because your financial advisor says that is the thing to do. Holding on for the long term may be good advice for one stock and not for another. No one has the experience to know exactly how things are going to change through this financial cycle. Research. Read. Here is one site but there are many others. Look here and here.