Why Warren Buffett is (Still) a Genius

August 6, 2009 · Leave a Comment

Bookmark and Share

buffett

The following article shows why Warren Buffett is the world’s best investor. While the federal government received a 23 percent annualized return for its Goldman investment (the bank agreed to pay $1.1 billion to settle warrants the Treasury Department received after injecting $10 billion into the bank in November), Mr. Buffett would realize an annualized return of about 111 percent if he sold his Goldman stake today, which amounts to $9.1 billion.

Buffett Goldman Stake Pays Richly

(NYT DealBook)

Warren E. Buffett showed again why he is known as one of the world’s best investors, thanks in part to another prominent investor, Goldman Sachs.

Mr. Buffett’s stake in Goldman is now worth $9.1 billion, or about $4.1 billion more than what he paid 10 months ago, according to an analysis by Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette.

According to Mr. Wilson’s calculations, Mr. Buffett would realize an annualized return of about 111 percent if he sold his Goldman stake, which is held by his conglomerate Berkshire Hathaway.

In comparison, the federal government received a 23 percent annualized return for its Goldman investment, the bank said after it agreed on Wednesday to pay $1.1 billion to settle warrants the Treasury Department received after injecting $10 billion into the bank in November.

Mr. Wilson calculated the annualized return to be about 20 percent assuming that dividends received on the preferred stock are used to pay down the national debt.

Goldman turned to Mr. Buffett in September, seeking a cash injection. In return, Mr. Buffett negotiated what was considered even then to be very favorable terms.

Berkshire Hathaway received perpetual preferred shares in Goldman, which pay a 10 percent annual dividend, or $500 million a year. Berkshire Hathaway also received warrants to buy $5 billion in common stock at a strike price of $115 a share, which could be used at any time within five years of the initial investment.

Mr. Wilson , who has become a national authority on valuing warrants, ascribed a $5.5 billion valuation to Mr. Buffett’s preferred shares and $3.2 billion to the warrants. He also calculated that Berkshire’s reinvested dividends from the Goldman stake were worth about $400 million. The valuation of the warrants was based on Goldman’s closing share price of $160.46 on Wednesday and the 10-year historic volatility of the shares.

(For financial wonks, Mr. Wilson used the Black-Scholes and Merton option pricing models with the dilution adjustments of Galai and Schneller.)

While Mr. Buffett is unlikely to sell his Goldman stake right away, he is allowed to do so under the deal with the firm, provided he can find buyers who are willing to pay his price.

At the time of Mr. Buffett’s investment, critics said that Goldman’s long run of soaring profits was coming to an end. As a federally regulated bank holding company, Goldman would not be able to take the kind of risks that have yielded profits and bonuses that defined Wall Street’s latest Golden Age, they said.

But last month, Goldman reported a second-quarter profit of $3.44 billion.


Categories: News
Tagged: berkshire hathaway, buffett, gain, goldman

0 responses so far ↓

  • There are no comments yet...Kick things off by filling out the form below.

Leave a Comment