Warren Buffett Prefers Preferred Stock

During their latest episode of the VALUE: After Hours Podcast, Kao, Taylor, and Carlisle discuss Warren Buffett Prefers Preferred Stock. Here’s an excerpt from the episode:

Jake: Michael, what do you think about Buffett? He tended to do a lot more preferreds during that time period than just purely long equities. Does that make sense to you? Was he thinking in fulcrum ways at that point?

Michael: Well, sure. But see, Warren Buffett though has an advantage that most people don’t. He gets sweetheart treatment there. And so, most people can’t go and say, “Hey, I’m going to take a billion in a pref.” I think it’s great. Usually, he does it like a convertible pref. So, that’s exactly the idea.

He’s getting the protection of being senior to the equity. He’s getting a very large dividend rate, but he still retains the equity upside. Yeah, that’s exactly what he’s doing.

I think we talked about it earlier before we started the recording, but one of my favorite value books, the reason why I like Seth Klarman’s Margin of Safety is that it talks about finding value across the capital structure as a continuum.

It doesn’t just focus on equity. Most people, especially the retail crowd, just think of equity. Most of the money I made in my career was actually buying distressed bonds. Yeah, anyways.

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