There Are Still Good Investments Out There

In investing, as any business, placing substantial value on the opinions or actions of one individual is not healthy. However, when that person is Warren Buffet and the subject is the stock market, ears tend to perk up.

Of course, Mr. Buffet is regarded by many as one of the greatest investors ever. On Tuesday, through his holding company Berkshire Hathaway Inc. (BRK.A), he invested US$5 billion in Goldman Sachs (GS), a Wall Street brokerage firm that have been in the spotlight since the fall of Lehman Brothers (LEH) and the buyout of Merrill Lynch (MER) last week.

So why is Mr. Buffet’s investment significant? The financial sector has been crushed by the credit crisis. Canadian financials are down more than 10% so far this year and their American counterparts are off by more than 30%. One of the most unfortunate and irrational consequences has been that many financial companies are being painted with the same brush regardless of  the sector of the financial business they’re in (banks, insurance companies, brokerages etc.), how they do business, or where they do business.

The lines between high quality, low quality and no quality have been blurred by continuous negative headlines. Buffet’s massive investment in “Goldman” signifies to many investors that there are still high quality firms within the sector.  

There Are Still Strong Financial Businesses

First, Buffet’s investment demonstrates that astute investors continue to focus on fundamentals and valuations despite the emotion that’s driving markets. They understand that confusion creates opportunities to add well-managed, high quality assets to their portfolios at great prices. Case in point - Goldman shares were down more than 40% on the year prior to the Berkshire Hathaway announcement.

Secondly, this is an opportunity to highlight the strength of Canadian banks, which have unfortunately been lumped in with their American peers. Investors should know that unlike their U.S. counterparts, Canadian banks are strongly capitalized and have well-diversified businesses, among other differentiators such as the strict Canadian governmental regulations that prevent the degree of meltdown that is happening in the United States.

Adversity not only exposes the weakest companies, it can also highlight the strongest. Like Warren Buffet, long-term investors should focus on high quality companies with attractive investment valuations and strong balance sheets. Because when the turmoil ends, and it eventually always does, these firms will be even more valuable and will likely continuing their leadership.

Comments

[AlexS:]

Buffett got shares of stock on terms unavailable to the rest of us. There really are different rules for him and those like him. Personally I think we should take him up on his earlier complaint and just tax the heck out of him.

2008 Sep 25 12:43 PM

[twill:]

You are exactly right AlexS. Buffett also has money that is not available to the rest of us. Do you think that GS would give me a similar deal on my investment of $10K?

2008 Sep 25 01:25 PM

[Urbane Gori...:]

Jim Rogers was on the tube today and said the exact same thing. I like Buffet as much as anyone... He puts on about the same 'Aw Shucks!' show as Pickens and is highly entertaining... However, lets face it, the whales have all the chips. All we can really hope to do is ride their coat-tails.

jegan ;-)

2008 Sep 25 02:32 PM

[muguwmper12:]

If you can't beat him at buying larger companies, work small caps where smaller purchases are more meaningful.

If you still can't beat him, but Berkshire.

2008 Sep 25 04:55 PM

[D-D:]

To be fair, Mr. Buffet is a much bigger player now. But I think what the author is trying to say here is that, we would be wise to pick up on his investing methods. After all, he started as a small player in the 50s.
valuestockinvestors.bl...

2008 Sep 26 08:15 AM

[TonyCinTX:]

Buffett got the same terms as anybody with $5B to invest, $20B in reserves and a triple A+ credit rating.

I am not being facetious; Buffett's bargaining position includes the ability to completely solve the $5B cash crunch problem GS has, in a way a guy with $1M or $100M or even $1B cannot.

The rules weren't different for Buffett; there are a spectrum of deals to be made at each level, including his, and he has made good deals at every level for 50 years and advanced to new levels.

A guy with $10K can't build a factory, a guy with a $1M factory can't really go public, a guy with $10M can't really dictate to his suppliers, because he isn't buying enough from them to completely solve any problem of theirs. Walmart dictates to THEIR suppliers because they can completely solve the problem of sales and distribution. Buffett is not playing by any different rules than Microsoft, Walmart, P&G or even Goldman Sachs.

The rule is simple, the bigger the problem you solve, the more power you have. Ultimately, this is just the discount for purchasing in bulk quantities; I guarantee you if I pay cash up front for an entire year's output from any factory, I am going to get a far, far more favorable unit price than buying one off the shelf at Sears. Because I eliminated a hundred costs, man-years of effort and all uncertainty, not to mention creating efficiency through planned purchases of raw materials, simplified product handling, etc.

2008 Sep 26 09:11 AM

[FRSHFSH:]

I am a teenager and do not fully understand the whole investment business. However, I do wish to invest the small amount of money I have WELL. Other than governemnt bonds, how can I use investing to better my financial situation.

Apr 29 03:24 PM