Back in the 18th century, Baron Rothschild (a member of the bank dynasty) said, "The time to buy is when there's blood in the streets." On its face, the advice makes sense. But, when it comes to actually doing it, most investors freeze up.
However, in the case of Warren Buffett, he had the guts to make some big bets when the financial system was in free-fall. In October, his firm, Berkshire Hathaway (NYSE: BRK.A), shelled out $5 billion to buy 50,000 shares of cumulative perpetual preferred stock of Goldman Sachs (NYSE: GS). The shares came with a 10% annual dividend. Oh, and Goldman also granted a warrant to buy 43,478,260 shares of common stock at $115 a each.
At the time, Goldman's share price was at $134.50.
Well, since then, Goldman's stock has spiked to $163.82. And yes, the company has posted outstanding profits and has gained share on its competitors.
Okay, so what has Buffett snagged on the deal so far? According to NYTimes.com, it looks like the gains are about $4.1 billion. This is based on using some complex valuation methods on the warrants (from Linus Wilson, who is an assistant professor of finance at the University of Louisiana at Lafayette).
All in all, Buffett had the advantage of structuring a preferential investment. Then again, even the typical investor could have made some nice gains.
Interestingly enough, another similar Buffett play was in General Electric (NYSE: GE) for roughly $3 billion. Although, it hasn't had much traction -- yet.
Tom Taulli is the author of various books, including The Complete M&A Handbook, You can reach him at his personal blog.
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Reader Comments (Page 1 of 1)
7-24-2009 @ 3:00PM
Harold said...
Warren leads the way again, no surprise there. The surprise was when some of the talking heads on CNN and CNBC were saying he had "lost his touch" at the time he was actually buying this stock. There certainly was blood in the streets, and this all time investing champion didn't hesitate to deliver a knock out blow for his investors.
Will we never learn that the best time to invest is when everyone else is running for the hills?
HP
http://Retirefund.Blogspot.com