How to Make Safe, Double-Digit Gains Outside the Stock Market This Year

If you could invest like Warren Buffett, would you? 

I'm not asking rhetorically. It's a sincere question. As you know, Warren Buffett, the billionaire investment genius and CEO of Berkshire Hathaway, has been getting sweetheart deal after sweetheart deal lately. I'm sure you've seen all the press about it. 

Rather than buying stocks, Buffett has been putting Berkshire Hathaway's money into unique deals that involve buying a hybrid security that's one part loan, one part stock. If you could get into these deals, would you? 

For example, in what was probably his best deal, Buffett bought a $2.6 billion note from Swiss Re, the giant European reinsurance company. The note pays 12% a year and never matures. In other words, if Buffett chooses to hold the note, Swiss Re will pay Berkshire 12% annually on $2.6 billion (that's $312 million every year) forever. If Swiss Re's stock price goes up, Buffett is allowed to swap that $2.6 billion note for Swiss Re's stock at a fixed price. 

With this kind of deal, Buffett is either going to make a pretty good return (12% a year forever) or a great return (if the stock goes way up). That's a nice obligation to own, isn't it? 

Buffett did similar deals last year with Goldman Sachs ($5 billion/10% coupon) and GE ($3 billion/10% coupon). Most recently, Buffett gave Harley-Davidson $300 million in a deal that yields 15% annually. 

Deals like this don't come along very often. But they appear frequently during severe economic contractions. They're the silver lining of a bear market. Of course, most people would tell you deals like the ones Buffett keeps getting aren't available to regular investors. 

That's just not true. 

If you look around, it's possible to find lots of different investments that offer individual investors almost exactly the same terms: double-digit fixed-income returns and the possibility of further upside in the stock price. 

For example, consider a stock many DailyWealth readers are familiar with, Annaly (NYSE: NLY). 

All of Annaly's assets are short-term debts (less than 10-year duration), fully backed by the U.S. government. So when you buy Anally, you're not taking on any stock-market risk whatsoever – as Annaly's assets have fixed principal amounts. You aren't taking on any credit risk either, as all of Annaly's assets are fully backed by the U.S. government. And if you can buy Annaly near book value (it's around 1.1 times book now), you don't take on any valuation risk either. 

By the time Annaly pays its dividend next month, my readers will have made at least $1 in income on their purchase price of $14 in about five months. That's about 17% annually... which is as much money as you're likely to make in stocks in a good year. It's also more than Buffett has been getting on his deals. 

Annaly isn't an isolated case either... My readers are on track to make at least 14% this year from a unique bond investment we put on in January. We also just bought a niche finance company that will safely pay us double-digit dividends this year (and offers nearly 50% capital gain potential).

To invest like Buffett you must be willing to take the extra step, to do something that's new and perhaps a little uncomfortable... like buying mortgages at the apex of the mortgage crisis... or buying foreign bonds when the dollar is soaring. There are no free rides in finance. 

But there is a tremendous difference between apparent riskand actual risk. Knowing the difference is what allows us to find and invest in these Buffett-like deals. 

I know the headlines are terrible right now. Most equity prices are going lower. But the current state of investor fear is producing a once-in-a-lifetime opportunity to safely make double-digit capital gains and double-digit yields. If you're hiding in cash and not taking advantage of it, you're making a big mistake. 

Good investing, 

Porter