Wisdom of Warren Buffett

During the 2008-2009 stock market crash, when the nation was in a total panic, he invested $5 billion with Goldman Sachs and got a terrific deal. According to “What Buffett deal says about Goldman Sachs”, 3-28-2013 Forbes, Buffett agreed to give Goldman $5 billion in late September 2008. In return, Goldman handed over $5 billion in preferred shares and a warrant that would allow Buffett to purchase an additional $5 billion shares at a price of $115, even though the shares were trading at $125 at the time, so in the money from the beginning.

For the preferreds, Goldman agreed to pay Berkshire a yearly 10 percent dividend, with option of buying back the stock at any time for 10 percent more than what Berkshire had paid, which Goldman did in April, 2011 for $5.5 billion. Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who has looked at the Goldman deal, puts the dividends at $1.3 billion. So that gives Berkshire a total return of $1.8 billion on the preferreds.

Now come the warrants. In the deal struck on Tuesday, Buffett’s firm won’t have to put up the $5 billion to buy the 43.5 million shares it has a right to purchase, which would be worth $6.4 billion today. Instead, Goldman is going to give Buffett the difference in stock at the time of the deal. Buffett’s return is the same, but he’s left with a much smaller stake in Goldman. All told, that means Buffett is walking away with a $3.2 billion profit on his four-and-a-half-year-old investment in Goldman, for a return of 64 percent. A classic value investor move. Swoop in when others are selling, and pick up dollars for pennies. Buffett’s legend is secure.

The investing public might need Buffett to remind them to “Be Fearful When Others are Greedy”. In a September, 19, 2013 interview on CNBC, Buffett said that “Stocks are more or less fairly priced now. “We don’t find bargains around but we don’t think things are way overvalued either. We’re having a hard time finding things to buy.”

The stock market reached its low around March 9, 2009, and it’s been more or less a booming market for almost five years. However, January 2014 saw the Dow-Jones stock market index dropped 5.3 percent and the S&P 500 slid 3.6 percent, their worst monthly percentage declines since May 2012. “When the first month of the year is negative, the chances of finishing the full year in the plus column drop to roughly 50-50, according to the Stock Trader’s Almanac (Source: “S&P 500 ends January with a loss: Bad 2014 Omen?” by Adam Shell and Kim Hjelmgaard, found in 1-31-2014 USA Today).