Buffett Buys Into Goldman

How many of you purchased shares of Berkshire Hathaway (BRK.A) when it was all over the news last November that shares were approx $150 dollars each. If you had purchased you would have seen your shares fall to a point in August of this year to approx $110 dollars a share, rather unsettling. However, last week like a shooting star BRKA jumped to $147 dollars a share. Anyone can see this by just looking at a chart, but the point I want to make all of this volatility really does not matter in the long run. You are associating yourself with one of the most astute investors of all times.

This was accentuated by this week’s current activity of Mr. Buffett. He is buying shares of Goldman Sachs (GS) to the tune of $5 billion dollars. He is not buying just the basic shares but the preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. On Monday, the common stock closed at $125.05, providing Buffett with an instant paper profit of $437 million (Not a bad day's pay for anyone including Mr. Buffett.).

The last time Buffett invested on Wall Street was in 1987, when New York- based Salomon Inc. pleaded with him for a $700 million cash infusion to fend off an unwanted takeover. Buffet ever the value investor has picked up Goldman Sachs after its stock has dropped approx 42%. It seems that Goldman was somewhat desperate and the cost to them could be considered to be high.

What is the stamp of approval from Warren Buffett worth?

Most investors have been so shaken from recent events it is hard to find them under any rock. Now Goldman is planning to offer stock to the public (approx $2.5 billion dollars), and one of Japans largest banks, Sumitomo Mitsui, is also considering investing.

So does this mean the credit crisis is over? Your guess is good as mine.

Still there are concerns present regarding Goldman. The leverage they manipulate is still large. For every dollar of shareholder equity, Goldman owned $23.70 of assets for every dollar of shareholder equity. That is 23.7 times but the leverage that regulators allow usually in the ballpark of 20 times. Even with this said, in this environment is this too much leverage?

Time will tell and you will need to be patient with Mr. Buffett. In 1999, shares peaked at approximately $80,000 and then fell to $40,000 per share (unsettling). It took until 2004 to arrive back at $80,000. However long term investors have been amply rewarded exhibiting patience.

Disclosure: None

Comments

[cocomurph:]

You may want to insert a "K" or the word "thousand" after the $150, $147 and $110 dollar prices for BRK/A! ;-)

2008 Sep 24 10:09 AM

[Andy Abraham:]

Lets hope I did not make a fraudian slip and the prices go there.I think in the editing of the article this transpired... all the best... Andy

2008 Sep 24 04:31 PM