What's the best way to play the eventual recovery? If you're Warren Buffett, the answer is (mostly) shunning common stock in favor of higher tiers of the capital structure.
Over the past six months, Berkshire Hathaway struck a number of privately negotiated deals with companies such as Goldman Sachs, General Electric, and Harley Davidson. Instead of getting a deal on a chunk of common stock, Buffett targeted preferred stock in the first two instances and bonds in the third.
The Oracle of Omaha's move is a savvy one. Not only does he get upside in a recovery scenario, but an economic rent in the form of a 10% dividend on his money while he waits.
Although his strategy makes sense, the underlying stocks of these deals lead to a horrible year for Berkshire. Investors who follow Buffett's lead can avoid such pitfalls by utilizing a more diversified approach to buying preferred shares, closed end loans, and corporate debt.
