It's not often> that the average investor can out-Buffett Warren Buffett, the world's savviest investor in the eyes of many. But at the moment, there's a rare opportunity to invest on terms that may be even better than Buffett got.
Rarely is the playing field level, let alone tilted in the average investor's favor. And there are good reasons why a Warren Buffett gets vastly better terms than either you or me. When we invest in something, it doesn't make news, let along the front pages. Buffett is not just a billionaire; he's a highly respected and admired one. His investments are seen as instant votes of confidence, which are more valuable than ever in the context of the current financial crisis when confidence is in short supply.
It was front-page news on Sept. 23, less than two months ago, when Buffett's Berkshire Hathaway (BRK.A)
As is his wont, Buffett stepped swiftly and decisively into this turmoil by agreeing to inject $5 billion into Goldman in return for $5 billion in preferred shares paying a 10% dividend and warrants to buy $5 billion of Goldman common shares at $115 apiece. Given that Goldman shares were then trading at $125, I was both slightly resentful at the generous terms Buffett had secured and, as a longtime Goldman shareholder, somewhat dismayed at the firm's apparent desperation for his vote of confidence.
Still, the Buffett play seemed to work its usual magic. Goldman shares stabilized and within days rose to $137. Goldman transformed itself into a bank holding company, the Treasury Department force-fed it and the eight other large, seemingly healthy giant banks, billions in capital in return for more preferred shares, albeit at much lower interest rates than Buffett's. (It's yet another measure of Buffett's extraordinary stature that he could command much better terms than even the U.S. Treasury.) And then, to my surprise, Goldman shares resumed their descent. They not only reached the Buffett strike price of $115, they sank below it. When Paulson announced last week that the government would no longer buy the "troubled assets" weighing on banks' balance sheets, an about-face on what had once been viewed as the linchpin of the government's rescue effort, Goldman's shares plunged to near $61.
It's not just the stock that plummeted. Goldman bonds were also caught in the downdraft, a casualty of carnage in the corporate bond market generally as well as renewed anxiety about the financial sector. The result, according to recent trading data compiled by FINRA, is that various issues of senior Goldman bonds, highly rated by both Standard & Poor's and Moody's, are now yielding over 8%. (Remember, bond yields rise as prices -- and thus, demand -- fall.)
Note that these Goldman bonds are senior to both Buffett's preferred stock and the government's, which means bond interest and principal gets paid before either Buffett or the Treasury. Even in the unlikely circumstance that Goldman would be facing default, I believe the government would have a strong incentive to protect its investment by injecting even more capital into Goldman. I find it especially puzzling that Goldman would suffer so on news of the shift in Treasury's strategy, since its balance sheet had relatively few of the toxic, illiquid assets that were supposed to be the subject of the government's largesse.
So here's the Buffett alternative available to any investor: You can't get the warrants he got, but you can get something quite similar for far less than $5 billion. When I last checked, Goldman call options with a strike price of $105 expiring in January 2010 were trading for about $10 a share. That's the equivalent of the right to buy Goldman shares at $115, which is what Buffett got. You pay just $10 a share.
Instead of preferred stock, you can buy Goldman bonds. A week ago, when I bought some, I was able to get a yield close to 10%. When I last checked the FINRA web site, the best I saw was a little over 8%. Still, that's not bad for senior, highly-rated paper.
True, this strategy only makes sense if you believe in the future of Goldman. I'm not an advocate of blindly following anyone, even someone with a proven track record like Buffett. As Goldman makes what may be an awkward transition into a more regulated bank holding company and adapts to the new world of lower risk and leverage, the firm may never return to the glory days when shares were $250 (circa Halloween 2007). But Goldman still has the talent, the resources, the clients, the history and the reputation to be the world's pre-eminent investment bank. That should be worth far more than $60 a share, not to mention bonds trading at 80 cents on the dollar.