I was among the many who took heart when the news crossed the wire last night that Berkshire Hathaway founder and CEO Warren Buffett was investing $5 billion in perpetual preferred Goldman Sachs stock. Many have been wondering where Mr. Buffett has been these last turbulent weeks. One analyst opined that he has been “‘lurking in the shadows’, looking for a deal,” which is perhaps an over-dramatization as Mr. Buffett tends to lurk in plain sight. The saliant phrase is that he has been “looking for a deal”–which in Mr. Buffett’s universe is something very different from the exotic schemes that have done so much to contribute to the current economic predicament.
And what a deal he got. The purchase of the preffered shares is a means of providing Mr. Buffett with an income stream on his capital in the form of a 10% dividend. Mr. Buffett also has the option to purchase an additional $5 billion in common stock at $115 a share at any time over the next five years. And I did not take heart simply because (disclosure) I own stock in Mr. Buffett’s company–I took heart because of what I know about his investment philosophy, and what this investment says about his prognosis for the financial markets.As may of you probably know, Mr. Buffett’s personal politics are anathema to most here at Redstate. I suspect that he, like Senator Biden, believes that paying personal income tax is the patriotic duty of the rich. Oh, the horror. Why should we listen to such a man?
We should listen because Mr. Buffett does not play politics–or patriot–with shareholder money, which is what he invested in Goldman Sachs yesterday. He had been approached to spend some of Berkshire’s copious cash on hand to rescue both Lehman Brothers and AIG, but had opted not to even though his action might have had a symbolic impact well beyond the investment and served to help avoid the financial woes of these last weeks and months. In his opinion, these were bad deals.
Mr. Buffett is a man who will not spend a shareholder dollar for God or country. He will do so because he thinks he is getting in return something that will be worth more than a dollar in some reasonable amount of time–and ideally worth a dollar many times over in the long term. This philosophy may seem simple, but it has allowed him to accrue more dollars than anyone else on the planet, so when he acts we should probably pay attention.
What Mr. Buffet’s investment in Goldman Sachs tells us is that he believes there is substantial upside value in the company, and that he wants in at this price to realize some of those profits for Berkshire shareholders. I think actions speak louder than words, but for those who want to hear about it he said as much in his interview this morning on CNBC (I’ll update with the additional transcript segments as they become available).
Matt Drudge is calling Mr. Buffett a “savior” today. I do not think he has any such aspirations. Mr. Buffett is not out to save the world, or even the country. He’s out to make money for Berkshire Hathaway. And if he has the confidence in Goldman Sachs, not to mention Treasury Secretary Henry Paulson’s misnomered “bailout” plan, to make this investment, then my bet is on him.