Breakout

How Buffett’s “Golden Rules” Garnered Big Goldman Profit

Jeff Macke
Breakout

Warren Buffett wins again! At some point today Warren Buffett is set receive 13.6 million shares of Goldman Sachs (GS) for no money down. With Goldman Sach's stock changing hands for just over $158 today, that means Buffett's Berkshire Hathaway (BRK-A) will get around $2.15 billion worth of stock making it one of Goldman's top 10 biggest stakeholders.

The shares are the final payout from a much ballyhooed deal Buffett struck with Goldman in September 2008, near the start of the financial meltdown. At the time the investment was billed as a $5 billion "cash infusion" in Goldman. The day after the the agreement was announced Goldman further infused itself with shareholder money when it doubled the size of its share sale to to the general public to $5 billion.

Through the patina of time, Berkshire's windfall is being viewed as the result of Buffett's oft-stated strategy of being "greedy when others are fearful." Coupled with Buffett's other investments at the time of the crisis, the lesson being peddled to Main Street investors is how the key to making money is to buy stocks when the markets are at their most volatile.

Related: Buffett Untarnished: Even Kass Couldn’t Slay the Dragon, Says Hagstrom

As is the case with so many things about the Oracle of Omaha, the legend and the facts have a complicated relationship. As Lee Munson of Portfolio LLC points out in the attached video, Buffett has a bigger playbook than the folks at home. "People have to remember that while it's wonderful that we have a cheerleder for American Capitalism, this is guy has his own set of rules."

Individuals who bought with Buffett by getting long the Goldman secondary at $123 saw their stock fall more than 60% in the next three weeks. The intrepid souls who still hold shares purchased the day Buffett gave his Goldman endorsement have seen their investment growth at a 4.3% clip, slightly more assuming re-invested dividends.

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Buffett's annualized return on the capital it put at risk works out to more than 20% a year. That's more than 4-times as much as Main Street investors who lapped up common stock when the Oracle of Omaha signed his $5 billion endorsement deal with Goldman Sachs, and encouraged others to do they same.

"It's the golden rule," says Munson of Buffett's outsized returns on an investment with better terms than most Americans will ever see. "He's got the gold so he makes the rules." Be it Wall Street or Main Street, it's always good to be king.

As a fun Post Script, after the deal with Buffett was sealed ex-Goldman board member Rajat Gupta apparently called then Galleon hedge fund king Raj Rajaratnam and gave him the information prior to the close of trading that day. Rajaratnam used the dirt to get long Goldman shares ahead of the news. Rajaratnam was said to have generated somewhere around "$17 million in profits or loss avoidance" from the information.

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