Buffet Buys $5 Billion Stake in Goldman Sachs

One good way to lose money is to do the opposite of what Warren Buffet and his Berkshire Hathaway enterprise do. It’s not that he’s perfect, but he’s right often enough and profits often enough to be the richest investor on the planet. So, the world should take note of his $5 billion investment in Goldman Sachs.

Mr. Buffet announced the purchase of the preferred stock after Tuesday’s trading ended. He gets a 10% dividend on his preferreds, plus a 10% premium if Goldman ever decides to buy them back from him. The Washington Post reported that he also got “in-the-money warrants giving him the right to buy as much as $5 billion of Goldman Sachs's common shares at $115 apiece. The stock closed Wednesday at $133.”

Mr. Buffet made this move just as the markets were starting to doubt whether the Paulson Proposal for $700 billion to buy up toxic bank assets would pass through Congress. Mr. Buffet told CNBC that he was “making a vote of confidence” in the plan’s future. “I am betting on the Congress doing the right thing for the American public and passing this bill,” he added, also saying, “I think the Treasury will pay back the $700 billion and make a considerable amount of money.”

This doesn’t mean things have hit bottom. Mr. Buffet could be completely wrong. Or there may be some more downside before things reverse. However, the meaning of his investment is clear. He believes that the $5 billion he invested will be worth more than that someday in the foreseeable future.

Keith Trauner, a portfolio manager at Fairholme Capital Management, told the Washington Post, “When you see Buffett do a deal for Constellation and Goldman Sachs, it’s not so much a bet that things are about to turn on a dime. It’s simply saying that a couple things that he understands and that make sense have popped onto the radar screen.” Frederic V. Malek of Thayer Capital Partners, echoed, “Nobody is smart enough to call the absolute bottom, but when you see a lot of smart money like this coming in, it's a pretty good indication that you are near that bottom.”

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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