Buffett's Biography: Is Goldman Sachs the New Salomon Brothers?

Warren Buffett’s official biography, The Snowball, does not reveal a great deal that was previously unknown about the world’s greatest investor who has always played his cards close to his chest.

But it did contain plenty of references to his failures as well as his huge successes, and is about as fair and balanced as any official biography. The danger with unofficial tomes is that they go to the other extreme and make unsubstantiated allegations that are hard to evaluate. Thus this work on Buffett is probably as close to the truth as we will get.

However, if I wanted to add something to update this seminal book - perhaps in the guise of an unofficial biographer looking for a newspaper headline - I would have to compare his 1986 acquisition of Salomon Brothers with his recent investment in Goldman Sachs (GS).

Error or Brilliance?

Both investment banking acquisitions were completely out-of-line with normal Buffett thinking, except the mantra to buy when stock prices are low. Both institutions were stuffed with derivatives, products Buffett has described as ‘weapons of mass wealth destruction’. Both employed legions of highly paid staff with huge bonuses. Both had performed brilliantly in a Wall Street boom and Salomon’s star slumped after a crash.

In the case of Salomon, Buffett was forced to spend one of the most miserable periods of his business career sorting out the firm’s problems, before achieving something that perhaps only he could have done: getting his money back.

Do great investors tend to repeat their mistakes? It would be nice to think that the master of them all learned his lessons. But I wonder.

Margin of Safety

Is the margin of safety provided by the high coupon exacted from Goldman sufficient to compensate for the plunging share price and dismal outlook for profits in the worst recession since the Second World War, while the former investment bank turns itself into something different during a Wall Street slump?

At the very least you have to wonder if the former giant of Wall Street has not shed its profit engines by dropping investment banking. Has Buffett again been seduced by former glory as he was by the past performance of Salomon? Will Goldman Sachs prove a firm with more depth?

Goldman Sachs has been characterized as the biggest hedge fund of them all, and you just have to wonder how a firm that has based its performance on leverage will perform in markets that are deleveraging. Perhaps it has a new strategy and Buffett has got it right this time.

Poor Susie

Elsewhere, I could have done without an agonizing description of the last days of the late Mrs. Buffett. This did show the human side of the incredible compounding machine, but I am not sure this is how this apparently generous and kind woman should be remembered.

The opening chapter on the Sun Valley 1999 conference and Buffett’s prediction that stock prices would move sideways - albeit with some major ups and downs - until 2016 was sobering, if only because it made you wonder why he recommended buying last October amid the carnage on Wall Street.

Buying on the dips could indeed be justified, and a rally has followed, but there seemed a logic to the original 1999 prediction that suggested US stocks were not necessarily the place to be in the future. That has also turned out to be highly prescient, and if you are taking a long-term view of investments highly relevant.

Silver Again?

We heard very little about Buffett’s huge and successful investment in silver a decade ago - even Berkshire Hathaway stockholders were not told until long after the silver was sold at a profit. Might he be leaning in that direction again?

Well if he could venture into investment banking for a second time after the Salomon debacle, history could repeat itself, and silver would be an excellent leverage against a coming gold price hike driven by inflationary bailouts and stimulus packages. Silver stocks might do even better!

Comments

[texalope:]

I suggest you read " The Culture of Success" to learn how Goldman has navigated 100 years of ups and downs to help you put the current situation in context.

Also, you can read the " Intelligent Investor" . One of the chapters trace the ups and down of 4 different businesses over a period of time.

My opinion is that all businesses are cyclical. The cycle presents an investment opportunity for investors with a time horizon that exceeds the daily newspaper headlines.

2008 Dec 28 06:37 AM

[Sage of Sug...:]

Some interesting thoughts, but overall the author seems to be out of touch on many key points.

Examples: The similarities between Salomon and GS--Warren never will, and will never need to, take on a role at GS that is similar to the one he did at Salomon. The only way Buffett will lose with the GS deal is if the company goes under--not impossible, but extremely unlikely. In the meantime he is collecting 10% interest, is assured return of capital (except if GS goes under), an is assured a 10% fee if the debt is repaid early. The warrants, if he gets to exercise it for a profit, is icing on the cake.

Another example: his 1999 call of a sideways market until 1916 was brilliant indeed. But remember the SP500 was in the 1300 to 1400 range then. In Nov 2008, with the SP500 around 750, the 1999 call if proven right, means a 1350 or so SP 500 in 1916--or an approximately 80% gain in 8 years. This is a annualized return of about 7 or 8%, plus a dividend of over 3% --for a cumulative return of around 10% for the next 8 years. Perhaps Mr. Cooper considers this inadequate. REMEMBER: Graham defined Investment as "an operation which, upon thorough analysis promises safety of capital and an adequate return"

2008 Dec 28 09:58 AM

[Sage of Sug...:]

Sorry about the typos--obviously, I meant 2016 where I typed 1916.


On Dec 28 09:58 AM Sage of Sugar Land wrote:

> Some interesting thoughts, but overall the author seems to be out
> of touch on many key points.
>
> Examples: The similarities between Salomon and GS--Warren never
> will, and will never need to, take on a role at GS that is similar
> to the one he did at Salomon. The only way Buffett will lose with
> the GS deal is if the company goes under--not impossible, but extremely
> unlikely. In the meantime he is collecting 10% interest, is assured
> return of capital (except if GS goes under), an is assured a 10%
> fee if the debt is repaid early. The warrants, if he gets to exercise
> it for a profit, is icing on the cake.
>
> Another example: his 1999 call of a sideways market until 1916 was
> brilliant indeed. But remember the SP500 was in the 1300 to 1400
> range then. In Nov 2008, with the SP500 around 750, the 1999 call
> if proven right, means a 1350 or so SP 500 in 1916--or an approximately
> 80% gain in 8 years. This is a annualized return of about 7 or 8%,
> plus a dividend of over 3% --for a cumulative return of around 10%
> for the next 8 years. Perhaps Mr. Cooper considers this inadequate.
> REMEMBER: Graham defined Investment as "an operation which, upon
> thorough analysis promises safety of capital and an adequate return"

2008 Dec 28 11:29 AM

[thatguy57z:]

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2008 Dec 28 03:19 PM

[Cellman49:]

People are changing their behaviour. The market has not priced in this long-term trend, but big money will real soon. Once it does, it will realize that the old metric followed by Buffet, et. al. will no longer work. Savings are going up; sales going down; corporations need to entice consumers to buy with extra low rate/prices on good and services. This trend should continue long past this recession. My prediction is that deflation will continue 5-10 years. My savings rate has gone from 5% of my annual salary to 15%. I plan on getting it up to 20% by 2010. I have several friends who are doing the same. We're assuming 0% return for the next 5-10 years and planning accordingly.

2008 Dec 28 04:28 PM