My average cost for this investment was between $12 (U.S.) and $12.50. My purchase dates ran from November, 2008, to Jan. 1, 2009, which was right in the heart of the doldrums.
The reason I'm so proud of this investment is this:
I could have bought it when the market totally tanked. I could have picked it up at $3 or $4 a share, or whatever the low was.
But buying Citigroup at 89 cents, for example, or buying GM at 89 cents - that isn't buying a stock, that's buying a warrant on management's ability to save the company.
That's not investing, that's betting.
However, once we knew that there were institutions that were going to be 'too big to fail' - as [U.S. President]Barack Obama has beaten to death - and once we knew that the Bank of England was behind Barclays, and once we knew that governments, globally, were going to do all they could to ensure the Tier One banks remained solvent, then I started to look around.
And, knowing that, historically, the long-term rate of return on the stock market is 7 per cent, I had these Barclays preferred shares, a security with a risk profile traditionally one-third as risky as a stock, one priced to give me a rate of return far in excess of the long-term rate of return of the stock market.
The Return:
The market value of BCS.PR.A as of Fri. April 23 was $24.16.
So my 'high' client has seen about a 95-per-cent capital gain, and my 'low' client has seen about an 85-per-cent capital gain.
But that's only half the story.
The second half of the investment: It's a preferred share, so my yield to clients, if they hold them for the rest of their lives, is an annual dividend of between 15 per cent and 17 per cent.
For my best client, the one-year return on this investment was more than 100 per cent.
This is the way I looked at it: Here I could buy a security with significantly less risk than equities as a whole that's positioned to give me a significantly greater return than equities as a whole.
And the beautiful part? As long as Barclays remains solvent and doesn't default on the dividend, this is an investment that my clients can keep for life.
Where else can you earn a 17-per-cent annual rate of return on your money from what was once a Triple-A bank and will again be a Triple-A bank?
That's not to say Barclays won't default on the dividend, but in the history of the bank, Barclays has never defaulted on a dividend.
Once the Bank of England was behind Barclays, why would I buy anything else? Why would I buy RIM? Why would I buy Citigroup? Why would I buy Bank of America?
At the time I made this investment, the most actively traded stocks were AIG, Bank of America and General Motors. And there was no volume, no interest in these preferred shares. I could go in and buy as much of this investment as I wanted.
It's a lifetime keeper. My clients that hold it are going to get 17 per cent a year for life.
You can't beat that.
I've bought all kinds of stocks, but this is the best investment I've made in the last 10 years. It's a once-in-a-lifetime trade.
The Takeaway:
There were two possible outcomes to the financial meltdown: The world as we knew it was either going to come to an end, or continue on.
There was no way the world as we knew it was going to continue if the people who finance it were not there. The world can function without banks, but the world as we know it can't function without banks.
So we, as humans, decided that the world as we knew it was quite fine, thank you very much, and we did what we had to do to save the banks.
And then we were at a place where I could say, "Okay, now I'm no longer gambling. Now I'm going to make an investment."
The next vital point: Whenever you have an asset class that is less risky than stocks that is priced to give you a return far in excess of stocks, back up the truck.
Maximize that opportunity, for it's the opportunity of a lifetime.
People seeking a 90-per-cent rate of return tend to lose their money. If, at that time, I invited people who invest in penny stocks, or people who were investing in GM or AIG, to buy this Barclays preferred share, they would have said no.
And that's the key. I don't try to get returns in the 90s; in this case, the market gave me this opportunity, and I took advantage of it. But I did so in a very prudent fashion.
My investment was rooted in research and understanding. I could have bought Barclays at 89 cents, at $1.20 - the opportunity was there. But I was not buying it as a bet. I was buying it as an investment. Until it became an investment, I had no interest.
That's my soapbox. I don't bet. I take educated risks, but I don't bet. That's for Pro-line.
This article was published in Globe and Mail
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