Month: August 2024

In recent years, Special Purpose Acquisition Companies (SPACs) became a popular investment vehicle, offering a way for private companies to go public without the traditional initial public offering (IPO). This trend attracted retail investors eager to own shares in the next hot company. However, as the initial excitement waned, many investors found themselves holding stocks that significantly declined in value.

Warren Buffett, renowned for his investment wisdom, has been skeptical of SPACs from the start. One critical issue he highlighted is the inherent pressure for SPACs to acquire a company within two years or return the funds to investors. This deadline can drive SPAC managers to make hasty deals, regardless of their long-term benefits for investors.

“If you put a gun to my head and said, ‘You’ve got to buy a big business in two years,’ you know, I’d buy one. But it wouldn’t be much of one,” Buffett remarked at the 2021 Berkshire Hathaway Annual Meeting.

Buffett recalled an interaction with a well-known figure who needed to invest the money quickly to avoid returning it to investors. “I had a call from a very famous figure many years ago who was involved in it and wanted to learn about reinsurance. And I said, ‘Well, I don’t really think it’s a very good business.’ And he said, ‘Yeah, but,’ he says, ‘if I don’t spend this money in six months, I’ve got to give it back to the investors.’ So, you know, it’s a different equation that you have if you’re working with other people’s money, where you get the upside and you have to give it back to them if you don’t do something. ”

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Warren Buffett, one of the most successful investors of all time, emphasizes a critical lesson for investors: history often repeats itself because people fail to learn from it. Speaking at the 2004 Berkshire Hathaway Annual Meeting, Buffett remarked, “What we learn from history is that people don’t learn from history.”

This observation is particularly relevant in financial markets, where boom and bust cycles are common. Despite past experiences with market excesses, investors frequently make the same mistakes, chasing quick profits during booms and panicking during busts.

Hear Buffett’s full explanation

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

When bull markets reach their zenith, a familiar spectacle unfolds: a flurry of companies rushing to go public through Initial Public Offerings (IPOs). Yet, amidst the fervor of investors clamoring for shares, one legendary investor remains notably aloof: Warren Buffett.

To Buffett, the allure of IPOs fades in comparison to the potential pitfalls they harbor.

Buffett’s skepticism stems from a fundamental principle: the pursuit of value. In his eyes, the frenzy surrounding IPOs often fails to yield favorable pricing. Unlike scanning through established companies in the stock market, where bargains may be unearthed, the IPO landscape presents a different dynamic. Negotiated sales dominate, making it arduous to secure advantageous deals. Drawing parallels to real estate transactions in his hometown of Omaha, Buffett illustrates how sellers in negotiated deals are keenly aware of market prices, thereby limiting the scope for bargains.

Central to Buffett’s argument is the concept of auction markets versus negotiated sales. In auction markets, where shares of established companies trade, the possibility of stumbling upon undervalued assets is more pronounced. This stands in stark contrast to IPOs, which mirror negotiated sales. Here, the seller dictates the terms, often without regard to the buyer’s interests or market conditions.

Buffett’s insights, articulated at the 2004 Berkshire Hathaway Annual Meeting, offer a timeless lesson in market dynamics. He underscores the importance of understanding the fundamental differences between auction markets and negotiated deals, highlighting the potential for occasional extraordinary bargains in the former.

In essence, Buffett’s stance on IPOs serves as a reminder to investors: the allure of new offerings may be enticing, but true value often lies in the patient pursuit of opportunities in the stocks that are already trading.

Hear Buffett’s full explanation

See the complete Lessons From Warren Buffett series

© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.