Warren Buffet's $5 Billion Investment

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Just last night I attended a financial seminar. I knew it was going to be interesting. My first clue was the location. The seminar was hosted in a tiny restaurant in a strip mall. A bagel shop to be precise. So much for the glamour of "Wall Street." The food was decent and the presenter was entertaining. The topic wandered a bit bouncing from the market, to insurance, to REITs. The general question being answered was what to do now with your money. What really caught my attention however was a comment from the presenter. It wasn't anything big or earth shattering. But he said it several times. I couldn't get it out of my head.

The comment? "Warren Buffett just bought $5 Billion Dollars worth of Goldman Sachs today!" Maybe it was the way he emphasized the words $5 Billion Dollars. Maybe it was the excitement in his voice - like he had just discovered a gold mine. Maybe it was the fact he said it twice and his co-presenters said it several times as well. Or, maybe it was the Wall Street Journal running a front page story about that very topic. Whatever it was, the statement really bugged me. Look, I'm just like everyone else. Seeing a really smart investor step up and put money on the table makes you take notice. Seeing an investing giant like Warren Buffett do it is even more influential. I started thinking about Buffett. You know, more than 10 years ago he wouldn't comment on his investments. He had a joke that he'd tell you but then he'd have to kill you. Now he's interviewing with Wall Street Journal reporters and calling into CNBC live.

I looked closely at this investment and it's a no brainer. As a matter of fact, I'd put my own money into Goldman on the same terms. Does anyone happen to know the home phone number of Lloyd Blankfein the CEO of Goldman Sachs (GS)? If you do, please let him know I'm interested in investing on the same terms. Seriously. Why's this investment a no brainer? The structure of the deal is exciting. It's an instant win for Buffett. It's the closest thing you can get to a guarantee in the markets. Buffett invests $5 billion dollars. Now that's no small sum. I certainly don't have that much money. But he's investing in a way you and I never could. First he's not buying stock on the open market. That $5 billion isn't going to flow onto Wall Street. Nope. He's buying the stock right from the company. That $5 billion is going right into the Goldman Sachs bank account. Second the security he's buying is different. He's not buying common stock like you or I would. He gets a special class of stock. A "Perpetual Preferred." What's that mean?

Two things. First his perpetual preferred gives him seniority over the common stock if, and it's a big "if", Goldman gets into trouble. Second it pays him a dividend perpetually - or forever. And that dividend gets paid to him before anything goes to the shareholders - that's why they call it preferred. The dividend's no small number either. He's getting 10% on his money. Keep in mind, the common stock's getting only a little more than 1% on their dividend. Warren can hold this investment forever . . . but if Goldman wants to buy it back. Well, they have to pay him a 10% premium. Sounds pretty good doesn't it. But wait. There's more!

That's right the sweetheart deal for Buffett isn't over yet. Warren also gets warrants on Goldman's stock. Warrants are simply contracts giving the owner (Buffett) the right to buy more common stock at a fixed price for a certain amount of time. It's like a call option but typically longer term. So Buffett gets warrants to buy another $5 billion worth of Goldman at $115 a share anytime in the next 5 years. Sounds like a good deal to me considering the stock price was much higher when the deal was being struck. Now before you dismiss this warrant, let me tell you something. This is probably the most valuable part of the entire deal. Keep in mind that today the stock's over $136 a share and his profits will be huge. How big?

We'll let's see here. $5 billion invested at $115 a share gives Warren 43,478,260 shares. And $136 less $115 gives a profit of $21 per share. So $21 times 43.4 million shares (and change) means a profit of more than $913 million. A profit of $913 million on a $5 billion investment is 18.2%. That's an annual return of over 900%. Not bad for a week's worth of work. I think when all is said and done, Warren will make much, much more on his investment. How? He'll wait till the stock rebounds to its 52-week high (of over $250 a share). I'll let you figure how much he makes then.

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Brian T Mikes has 1 articles online

Brian Mikes is the editor of the Dynamic Wealth Report, a free investment newsletter that offers investment ideas and news you can't get from the mainstream investment press. Brian and his team bring decades of Wall Street and Silicon Valley experience to help you discover profitable trading ideas you can use today.

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Warren Buffet's $5 Billion Investment

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This article was published on 2010/03/30