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Financial Opinion and Insights

Warren Buffett Likes Bank of New York Mellon?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

It might seem that way!  According to a November 23rd articles in Advisor Perspectives, Warren Buffett purchased 1,992,759 shares of Bank of New York Mellon during this past July through September quarter with an average share price of about $26.13, which came to around $52 million+.  

Let’s start with a note of caution:  Don’t run out and start buying the bank’s stock simply because of this post.  The purpose of this is to, hopefully, provide some food for thought about investment philosophy.  This is neither an analysis of BNY’s stock nor a suggestion you should buy it.  On the contrary, you should do your homework first and talk to your advisor.  If you’re really smart, you probably have professional institutional managers handling all this for you, instead of treating it like recreation, which far too many people do.

It’s worth noting that when anyone makes an equity purchase, what is received is partial ownership of the net assets of a company and a share of all the future earnings generated by those assets.   It’s interesting that Ken Anderson, CFA, noted that since Value Line had estimated BNY’s book value per share at around $25.15, it would appear Mr. Buffett paid a zero premium for these assets.

BNY Mellon is not a stranger to our clients.  It is currently the largest global custodian, entrusted with $24 trillion of other people’s money and is one of the 10 largest asset managers in the world with over $1 trillion of discretionary money management.  It is also the largest global trustee of funds borrowed by others, servicing over $12 trillion in outstanding debt; so, it’s no wonder they’ve earned the highest credit rating among U.S. banks by third party rating agencies and have received numerous awards as the top-ranked client service organization in the world.

So, why is Warren Buffett interested?  You will probably have to ask him to get a correct answer, but I believe there are some hints, contained in the article I cited above:  The Bank of New York Mellon is generating over $800 billion of new capital per quarter that isn’t needed for servicing debt; that’s $3.2 billion per year available to increase dividends, buy back shares, or expand operations through organic growth or acquisitions.

There’s maybe another reason, too.  Warren Buffett, unlike most investors if history is a guide, doesn’t appear to go for `home runs’ like so many others.   According to Alice Schroeder, author of the unauthorized biography of Warren Buffett, entitled, Snowball, during her presentation at last year’s Value Investing Conference held at University of Virginia’s Darden School of Business, Mr. Buffett seems to aim for a `good enough’ standard which she has calculated at around 15% annually.  Without going into detail on her detailed analysis of numerous Warren Buffett investments – including those going all the way back to his first one in 1959 –  it would seem he looks at the price, the terms, and the people, and would seem to provide us with a little insight as to his philosophy:  Seeking companies with an ability to earn 15% on investment (ROI) within the business, letting future market value take care of itself.

The lesson:  It’s all about process and philosophy.  And, like building a house, it begins with a plan.  If you don’t’ have one, contact your advisor and get started.  That’s your best advice. 

Jim

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.