Quote Originally Posted by GTM 3442 View Post
Indeed. Companies do diversify their source of funds, with equity, bank funding, and bonds.

"Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses?"
Banks do lend to small businesses, but they want security for the loan, and for many if not most small businesses, the only security that is available is either a personal guarantee or a mortgage over (residential) property - usually the small business-owner's house. I suspect that this is simply a result of the retail banks making most of their money from residential property loans, and having little understanding of anything else.


"A reason why Buffet isn't a big fan of owning junk bonds?"
I'm not a fan of junk bonds either. After all, what would it take for an Apple to turn into a Blackberry for example? I run a portfolio of directly held New Zealand bonds, bought at time of issue, to be held to maturity, average credit rating of A. The income goes to fund other investments - bond income provided the funding to buy into the 2013/2014 New Zealand electricity company floats.

". . . a local Christchurch firm Jarden. . .
They're actually a diversified national financial services company, ex First NZ Capital ex Credit Suisse/First Boston. Last time I talked to them (2015?), the 1% annual account management fee came down to well under 0.5%. I suspect that it depends on what you want from them.

Out of idle curiosity, when I own shares and bonds in New Zealand, these are held at the registry in my name, without any third party custodial arrangements. Is this the case in the US/Canada, or are shareholdings/bonds held by the broker - with or without DIMS?

"Bonds have their place... but in Warren Buffet's books (and he's getting near 90 years old), don't waste your time unless you're the person that can name the terms of the bond rate with warrants and options
Can you explain what this actually means? The "warrants/options" makes no sense to me in the context of holding individual bonds.

Thanks for the posts, I'm learning a lot.
There was a time when banks didn't require the kind of collateral like putting up your own house to get a loan for a small business venture. Nowadays, the banks are really only interested in lending on residential housing with a simple process of just having 20% down and just the backs of your day to day job showing how much income you made a year (or over 3 years).

In the US / Can, the broker is held responsible for keeping records for their clients. Such as shares they own, taxation slips, tax sharing with the IRS/CRA, and more importantly, dividends received are 'AUTOMATICALLY' funded into their account. Ironically, no one that I know would prefer a listed company to issue cheques to their shareholders (that's so 1980s) yet, it seems in NZ, there's a wide range of companies that still issue cheques, despite how the retail banks like Kiwi Saver are ending cheque processing. For US/Can, the argument isn't about the shareholder wanting to "choose where they can deposit their dividend cheque payments". The issue is about keeping tax compliances and the broker needs clear records of the ins & outs on the account.

The GFC in 2008, many banks went bankrupt in the US and Goldman Sac was in a jam needing serious $ (for which at that moment, the US gov't had no talks of bail outs yet..). They approached to Buffet and they made a deal:

https://qz.com/67052/heres-how-warre...goldman-sachs/

"1) $5 billion worth of “perpetual” preferred shares. While technically a share of stock, preferred shares are a bit more like a bond. They’re slightly safer than “common” shares, because—should anything like a bankruptcy happen—preferred shareholders stand in front of common shareholders in the line to get their share of the proceeds from the garage sale of the liquidated company. They also typically pay a dividend. Goldman agreed to pay a 10% dividend on those preferred shares to Buffett, which cost Goldman about $500 million a year."

2) Warrants for 43.5 million additional shares. Warrants are similar to options. In this case they were the legal right to buy a stock at a particular price, which for Buffett was $115 per share. The deadline for exercising these warrants was Oct. 1, 2013.

How much did Buffett make on the deal?

and in return:

"So, all in, Buffett made about $1.75 billion in cash and about $1.35 billion in stock, or roughly $3.1 billion on the Goldman investment. That’s about a 62% return on a five-year investment. Not too shabby."


Buffet named the terms at a time when there was no one else that willing to lend $. The compelling issue is for the NZ investor, you're not going to see such deals going around in NZ. I mean that's not how NZ fund managers work on or part of their scope (but in Buffet's case, the deals are all for his Berkshire Hathaway shareholders). When a company gets in a jam or heading to bankruptcy.. generally in NZ terms, they go through a slow death as their share price goes to zero. This is not to say companies in the US don't go to zero but usually there's a long process of disclosures before that happens.