Aside from his ability to pick great companies, Warren Buffett (Trades, Portfolio)'s other most impressive quality is his ability to buy and hold securities.
Buy and hold
One only really finds out how difficult it is to buy hold stocks for an extended period, such as a 10 years or more, when one has been investing for several decades. Investors are constantly bombarded with reasons to justify selling, and it requires a tremendous amount of willpower not to.
There are many examples I could use of Buffett's staying power, but I wanted to concentrate on just one: his investment in Bank of America Corp. (BAC, Financial).
Buffett reportedly made the decision to buy the stock when he was in the bath in 2011. He offered the bank's then-CEO, Brian Moynihan, capital, which the manager initially refused. However, Buffett convinced him that taking the money would help boost the bank's share price.
As he had done many times before, Buffett structured the deal in his favor using preferred shares. Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) invested $5 billion in preferred shares redeemable at a 5% premium and paying a 5% annual dividend. On top of this, the group received warrants to buy 700 million shares in the bank at a price of $7.14 anytime within the next 10 years.
A long-term investment
Right off the bat, this deal was structured as a long-term investment. The 10-year warrants signified the Oracle of Omaha's intention to hold the stock for a decade and not flip it for a quick profit, which he could have done as the stock jumped after the deal was announced.
And there's more to it than that. Due to the way the deal was structured, Buffett was able to redeem Berkshire's preferred shares, pick up a check for $5 billion from Bank of America and then use this cash to buy the lender's shares at a discounted price.
He eventually exercised the warrant in the middle of 2017. The warrant allowed Berkshire to acquire 700 million common shares at a price of $7.14, less than half the then-price of $24.32.
Berkshire gained a considerable profit from this deal. Buffett converted the preferred shares after the bank hiked its dividend to 12 cents per quarter, easily covering the missed interest payments (Buffett had estimated the bank's annual dividend would have to hit 44 cents to meet this target).
The Omaha, Nebraska-based conglomerate has added to its Bank of America holding by around 50% since then. As of the end of the second quarter, it owns approximately 1 billion shares worth $42 billion. The initial 700-share stake is worth around $29 billion. Buffett turned $5 billion into $29 billion excluding dividends.
Plant the tree today
Most investors will not be able to replicate this deal. Buffett was only able to negotiate the preferred shares with Moynihan because of his reputation.
However, this is probably one of the best examples I have ever encountered to illustrate Buffett's simple quote, "Someone's sitting in the shade today because someone planted a tree a long time ago."
It has taken 10 years for Buffett's trade to play out. He could have sold up and moved on at any point during that time frame, and he would have received a great return.
Berkshire was earning 5% on its capital, and he could have converted the warrants for a quick buck when the stock hit $10 per share. But he kept holding, and he is still holding to this day.
Who knows how much the position will be worth in another 10 years, and how much wealth this will have created for Berkshire shareholders.
The point is, successful investing takes time and patience. Finding the best ideas is only part of the equation. Even structuring a deal entirely in one's favor may not be enough to earn the sort of outstanding returns Buffett has achieved throughout his career. This is probably one of the most valuable lessons investors can learn.
