Warren Buffet: Charging in Blindly -> massive revision!

MASSIVE EDIT AND REWRITE TIME:

As it turns out, I did not realise something about Buffet's Goldman Sachs purchase.

Namely, it turned out not to be a purchase whatsoever.

In fact, what Buffet did is he gave Goldman USD5 billion in exchange for USD5billion of perpetual preference shares (which are not shares at all btw), and warrants allowing him to purchase USD5 billion worth of Goldman Sachs at USD115, with 5 years expiry.
Info from http://www.istockanalyst.com/article/viewarticle+articleid_2653370.html
http://bigpicture.typepad.com/comments/2008/09/i-got-75b-but-i.html

These preference shares basically mean that Goldman Sachs has to pay 10% dividends every year(500 million) to Buffet. (actually to Berkshire). And, since this is a preferred, it gets paid out of net income in after tax dollars dollars!!! So it's actually equivalent to 15% aka 750million per year.
However Goldman Sachs is allowed to redeem these shares aka cancel this deal by paying Buffet USD5.5billion. Not bad not bad.
And as everyone says, they're pretty sure that he made a deal with Treasury that would ensure that Goldman would not be allowed to go bust. (which explains the shift in policy from bailing out mortage holders to bailing out banks)

Risk? I'm sorry, I have to eat my own words. Buffet's deal here is pretty much as risk free as he can get, as he cannot lose unless Goldman goes under, and even then I think he gets his money back as preferenced shares are pretty high up the repayment plan.

Buffet's only exposure to Goldman Sachs price is those warrants (that he essentially got for free). And that's only positive conditional exposure, he actually has nothing to lose from goldman's price, but he can gain a bonus if it goes above USD115.

Well done Buffet.

He HAD made some stock purchases that were a little early, but, hey, I've decided to take a little closer look at the picture before calling my shots now...



My earlier post is also here.

Early on in this crisis, Buffet started on a buying spree, saying that he was buying American stocks, and that everyone should follow him.

Buffet has already proven himself wrong. Those who jumped in when he did have gotten SLAUGHTERED.
And they have a lot less disposable income than he does.

Buffet has been very inconsistant with his normal behaviour in this case. I seriously blame it on his being a patriot, and pressure from his pals in the US Treasury.
Normally, Buffet exercises caution and prudence. This time, he's thrown it all to the winds.

Normally, a prudent investor would spend his bullets in stages. Sometimes, you are too slow, and you still have unfired bullets when they bottom has passed.Sometimes you guess too fast, and you run out of bullets too far off from the bottom.

However, Buffet seems to have projected the slide to only occur for a month or two, judging on his market timing. IMHO, he has run out of bullets FAR too early in this war.

I basically liken him to normally being a general, a military strategist. He controls the field of battle with his words and actions.

His buying spree some time ago was more like a berserk Norse Warrior. Or Rambo. Or GI Joe charging into enemy lines.

The thing is... his argument seems to be pretty much that different times advocate different tactics. And Buffet admits that he has NEVER in his adult life come across a situation like the current crisis.

I think that if you have had a winning formula your whole life... why change it? Buffet has always been more of a "slow and steady" "rule number one is preserve your capital, rule number 2 is remember rule number 1". He has done so spectacularly well his whole life by AVOIDING MASSIVE LOSSES through being prudent and cautious.

Oh, I have no doubts that someday, SOMEDAY, his investments that he made this time will make money.

But it sure looks like he would have made a lot more if he had staggered out his purchases a bit more.

Furthermore, he's completely changed his allocation of assets by using his PERSONAL funds... he's kept those in bonds all this time. I don't recall him switching out of those at the bottom of the tech bubble... what's so significant about this point in time? Seriously, I know that he made some purchases at the bottoms of the other bubbles, but I've never seen him quite THIS aggressive before... and certainly not so early on in the cycle. Normally he steps in AFTER consumer sentiment is jarred by unemployment figues. Or perhaps he begins quietly buying small amounts throughout the bear cycle.

This is the first time I've heard of Warren Buffet whanging everything at one go and announcing to the whole world to follow his lead.

It's seriously all very strange. It's like he's thrown away his old concepts of prudence and is advocating long term investment, short term gambling. I'm pretty sure that he KNOWS that the average American has taken some heavy losses, and simply cannot afford to lose any more money in the SHORT TERM... whatever the long term results are.

The old Buffet that I know of would have warned the everyday American not to put themselves in short term danger.
The old Buffet I remember would have put in some warnings, some disclaimers. Some stuff to disuade those people who are already in a hole from digging themselves even deeper.

Er. What happened to the old Buffet?

Weird.

Nonetheless... I'm not The Angry Investor today. Though I criticise his recent bizarre change in personality and investment technique, I can't quite get angry with the Oracle of Omaha. A lot of what I learnt comes from him... well, the old him, at any rate.


Sometimes, I worry that Warren Buffet has actually had a heart attack and passed on, and the American Government got worried and replaced him with a lookalike. ... That would explain a lot, and I'm sure you could see the rationale behind such an action. Frankly, I think that Buffet dying at this point in time would cause a worse damage to world ecnonomics and financials than an assasination of their president.

Hahaha. But who wants to listen to conspiracy theories anyhow?

In any case:


Summary: Warren Buffet is not behaving like his usual self. Those who have been his followers all this time, better start treating what he says with a pinch of salt, and a lot of caution.