2017: How did Buffett decide whether to exercise the Bank Of America warrants?

AUDIENCE MEMBER: Hello. My name is Erin Byer. And I was born and raised in Pasadena, California, and I currently live in New York City.

It’s been a dream of mine to come here today. I’ve been a proud BH shareholder for almost 20 years.

I asked my dad for stock for Christmas when I was 15. And I kept thinking at the opportunity to ask you a question today that I should make it one that would change my life.

Well, that question is, do you know any eligible bachelors living in the New York City area? (Laughter and applause)

WARREN BUFFETT: Well, you certainly have the approach toward life that Charlie and I would. (Laughs)

AUDIENCE MEMBER: But the question that might make my Monday, back in the office: back in 2011, you purchased Bank of America preferred stock with a warrant. You had the opportunity, at a later date, to exercise and convert those into common shares.

When you’re looking at evaluating that decision to exercise that position, which would increase all of our Berkshire holdings — or the value of the Berkshire holdings — what are you going to consider when you’re looking at that?

WARREN BUFFETT: Well, it’s almost — well, if the price of the stock is above seven dollars a share, which seems quite likely, whether we were going to keep it or not, it would still make sense for us to exercise the warrant shortly before it expired, because it would be a valuable warrant, but it’s only a valuable warrant if it’s converted — or if exercised — and exchanged into common. And that warrant does expire.

So, as I put in the annual report, our income from the investment would increase if the Bank of America ever got to where it was paying 11 cents quarterly.

We get 300 million off the — a year — off the preferred. And for us to use the preferred as payment in the exercise of the warrant, we would need to — we would want to feel we were getting more than 300 million a year by — and that would take 11 cents quarterly.

They may or may not get to where they pay that amount before the warrant expires in 1921 — or 2021.

If we — if it does get to there, we’ll exercise the warrant. And then, instead of owning the five billion of preferred and the warrant, we’ll have 700-plus million shares of common.

Then that becomes a separate decision. Do we want to keep the 700 million shares of common?

I — if it were to happen today, I would definitely want to keep the stock. Now, who knows what other alternatives may be available in 2021 or —

But as of today, if our warrant were expiring tomorrow, we would use the preferred to buy 700 million-plus shares of common. And we would keep the common.

If they get to 11 cents quarterly dividend, we’ll convert it. And we’ll very likely keep the common.

And if we get to 2021, if the common’s above seven dollars, which I would certainly anticipate, we will exercise.

So that’s all I can tell you on that. But I certainly wish you success on your other objective. (Laughter)

And I think, probably, the fellow will be using very good judgment, too.

OK. Charlie?

CHARLIE MUNGER: Well, I think it’s a very wise thing for a woman that owns Berkshire stock and is a good looking woman to put her picture up like that. (Laughter and applause)

WARREN BUFFETT: It does give me a thought, though. We might actually start selling ads in the annual report. And — (Laughter)

OK. That — incidentally, that BofA purchase, it literally was true that I was sitting in the bathtub when I got the idea of checking with the BofA, whether they’d be interested in that preferred.

But I’ve spent a lot of time in the bathtub since, and nothing’s come to me. So — (Laughter)

Clearly, I either need a new bathtub or we got to get in a different kind of market.