Shot on Goal: An ETF Warren Buffett and Wayne Gretzky Might Like

Everyone's been talking about Warren Buffett's New York Times Op-Ed piece. (The Oracle of Omaha said that it's time to buy American stocks.)

Indeed, he has mostly let his money do the talking; he's been buying stuff for the future. Or, in Warren/Wayne Gretsky-speak, "I don't skate to where the puck is, I skate to where the puck's going to be."

However, Warren Buffett has not simply bought everything and anything. Granted, he has purchased companies outright like Constellation Energy (CEG). Yet his largest investments have been in bond-like equivalent preferred shares, not common stocks.

For instance, he wrote a check to Goldman Sachs (GS) for a preferred shares deal with a double-digit yield. And he obtained other goodies from GS that allow him to get the common shares at a price point of $125 at a future date. But he did not buy the common shares of Goldman outright.

The U.S. government, following Warren's lead (or that of the Italian government), is doing something similar. Rather than turn capitalism upside down completely, the U.S. government is taking a preferred share interest in the nine big banks, not a common stock interest.

The distinction(s) is critical; specifically, the preferred share frenzy will handle the credit crisis, with lending spurring business activity slowly. But a global recession will still keep common stocks feeling uncertain, and maybe volatile for the foreseeable future.

So even if the "bottom is in," even if common stocks can pull off a 10% / 15% / 20% return over the next 9-12 months, a return to lower volatility / high reward returns may take 18-24. So yes, while a 2-year time horizon is nothing, and most investors should consider getting common stock heavy for the longer term, the risk-reward uncertainty may be more than Joe / Josephine Carpenter can bear.

Is there a solution? Possibly. The iShares Preferred Stock Index (PFF) offers Warren-like double-digit percentage yields of roughly 11%. The potential for appreciation is here as well.

More importantly, even a flat stock market can lead to double-digit gains for PFF over 12 months. And that may be more important for those who have been shaken as well as stirred.

Technically speaking, PFF looks primed for a significant run. A view of the 10/6-10/14 round trip shows that preferred shares came back to levels pre-October crash, whereas common stocks in the S&P 500 were still 10% lower.

In addition, the iShares Preferred Stock Index (PFF) had been marking lower lows all year long... first in the Bear Stearns mess, then with the Fannie/Freddie debacle, then with the Lehman bankruptcy and last with the full-blown credit crisis panic. Today, however, "higher lows" on the down days are occurring. Moreover, the gains off of the bottom came atop of record-setting volume.

  
Disclosure:  Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. 

Comments

[MiddleOfRoader:]

The article doesn't mention that PFF appears to be trading at around a 4% premium to NAV.

Also, PFF is heavily weighted towards financials (88%) with the top 4 positions (22%) in Wells Fargo, Citigroup, JP Morgan and BAC trusts. The article doesn't mention under what conditions, if any, the dividend rate on these could be cut, and what impact the government's preferreds would have on these, if any.

2008 Oct 20 08:47 PM

[Dunvegan:]

Banks use prefs to raise capital in the market subject to limitations imposed by Basel capital adequacy requirements, thats why it is heavilly skewed towards financials. The prefs are normally issued with a defined yield. If a bank defaults on its pref div payments it usually means its gone bankrupt - which up until recently, was considered remote! Prefs are used quite extensively in South Africa as a tax effective way to earn an income, as dividends are not taxed in the hands of the investor.

2008 Oct 21 08:47 AM

[Thomas Smic...:]

No investment is without risk. I agree with the author and own PFF as a recent addition to my portfolio.

2008 Oct 21 11:11 AM