September 24, 2008, 6:00 am

Goldman Sachs is a buy… says who? Warren Buffet

by: The Financial Blogger    Category: Uncategorized
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Is it time to buy financials? Stop laughing, I’m serious. Actually, I’m not the one telling you to pull the trigger, Warren Buffet is. Who is Buffet? In case you’ve never heard, he is (not much debate about it either), the most famous investor of all times. He runs Berkshire Hathaway inc, an investment company that has had exceptional returns for decades now. I will discuss more about the Buffet methodology and what he looks in when investing, but the basics are: value, market leader, simple business.

Now, it’s easy to see that in this specific case (Warren Buffet announcing a 5$USD billion investment in Goldman Sachs (GS), the attractive part is not the simple business. In fact, Warrant Buffet probably thought for a long while before investing in this one as he usually sticks to very simple businesses (except for maybe the several ties to insurance companies). So an investment of this magnitude is done because Buffett and his very talented team have determined that Goldman Sachs is vastly undervalued.

Sure, Buffet has been wrong in the past, and might be in this case. But errors from the famous investor have been fairly rare and I would guess that if he determined it was time to get back into the beaten down financials (GS is actually down 42% so far this year), that sounds good enough for me. Of course, it will be a bit more expensive to buy the stocks as there are quite a few “Buffet followers”. In fact, the stock jumped 11% in overnight trading today after the announcement.

And while there are still a few worrying aspects about Goldman Sachs such as its high leverage ratio (owning 23$ of assets for every dollar of shareholder equity), we tend to think that Buffet probably has a very good idea about the stock and a lot more info than we do.

“Goldman Sachs is an exceptional institution,” said Buffett, the 78-year-old chairman and CEO of Omaha, Nebraska– based Berkshire Hathaway. “It has an unravelled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”

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Way to go Mr. Buffet. He follows what he preaches … buy low sell high.

Warren Buffett is telling you no such thing. Mr. Buffett got a deal that no other investor can get. For his $5B investment, he got perpetual preferred shares paying 10% (redeemable anytime at a 10% premium) and warrants to purchase stock at $115 that are already in the money to the tune of 1/2 billion. You or me can only buy GS common stock at current prices on the open market. You can bet your dollar that Uncle Warren is pretty sure that GS won’t go belly up because that’s all he is betting on. Common share buyers are betting that GS will be a good stock to own over the long term. There is a world of difference between the two.

I don’t agree, there is not a world of difference… there is a difference. Of course, someone investing such an amount will have a major advantage, I never intended to say that we could have the same performance as Warren Buffet will have… but I do think that he believes in this stock and is not doing this deal simply hoping that GS will survive but rather because he believes the company is undervalued, quite simply…