This past month, Warren Buffett announced that his company, Berkshire Hathaway, was indirectly acquiring a $400 million stake in Home Capital, the Canadian alternative mortgage lender. This prompted many individual investors to think that it would be good to jump in with him – after all, he is one of the greatest investors in history. Good idea, right?
Not so fast.
Back in late 2014, Home Capital was riding high. The Canadian housing market was in full flight and the mortgage broker’s stock was trading over $50 a share, up from $20 just three years earlier. Home Capital had achieved rarified air, becoming the new darling of the Canadian stock market. Through the first half of 2015, Home Capital stock remained between $40 and $50. However it all came to a crashing halt in July of that year, when the Ontario Securities Commission (OSC) announced that 45 brokers at Home Capital were suspended over falsified mortgage data. Home Capital spent the next twenty-one months dealing with fallout. After an initial drop to around $30 a share, the stock remained in a range between $25 and $40… until it got worse. In April of 2017, the OSC announced it was pursuing an administrative proceeding against Home Capital. The stock fell from $22.23 on April 19 to a low of $5.68 the next day. The company endured a run on its GICs (or Guaranteed Investment Certificates) and top management changes. Since then, the company has received some liquidity support and emergency funding, helping the stock rebound to around $16 a share by June.
Enter Buffett. On June 21, he announced his intention to make the equity injection into Home Capital. The stock jumped immediately from $14.94 to $19 on the news, as Buffett’s support was deemed gold for confidence that the company’s troubles were over. But before jumping in, consider what you would pay compared to the deal Buffet received. You and I would pay market price for Home Capital, or around $17 today. Buffet’s equity deal is in two tranches. In the first, for a 20 per cent equity stake, Berkshire will pay $153,225,739 for 16,044,580 shares, or $9.55 a share, a 36 per cent discount to the market. In the second tranche, Berkshire will invest another $246 million for 24 million shares, or $10.30 a share. Overall, Berkshire’s total 39 per cent stake will be acquired for about $10 share. This is 40 per cent below the $17 a share you and I would pay today. This discount covers a great deal of risk for Berkshire.
As discussed above, following directly in Warren Buffet’s path is not easy for the average investor. Just blindly buying whatever he gets into usually means you would be buying in at significantly higher prices than he did, and taking on much more risk. Such are the advantages enjoyed by very large investors. In Home Capital’s case, the company’s troubles are by no means over… it may take many years to regain investor confidence and for the stock to recover.
Warren Buffett takes risks putting his money to work and gets rewarded for it (when they work), and we as investors should applaud his astuteness and willingness to take these risks. But in making our own investment decision to follow his path, particularly in retirement accounts, it is imperative to keep in mind that we would be taking inherently higher risk than Buffett. As a CNBC commentator said, “only Warren gets those kinds of deals”.
The cleanest and most efficient way to benefit from Buffett’s abilities is to buy Berkshire Hathaway and enjoy the value creation he achieves for his company. We have held BRK.B as a core holding since 2014 and have enjoyed double-digit gains over the period.