Investors love to follow Warren Buffett, and shadowing the great man is often easy. Since Mr. Buffett is a big fan of Coca-Cola Co., you can buy Coca-Cola too. Ditto for Kraft Foods Inc. However, his latest investment in Goldman Sachs Group Inc. highlights the fact that Mr. Buffett often goes where retail investors cannot follow.
“The difference between being Mr. Buffett and us is clear, and speaks to the challenges that retail investors have when they try to invest in the public markets,” said Mark McQueen, who writes the Wellington Financial blog.
The Goldman Sachs deal involves Mr. Buffett – through Berkshire Hathaway Inc. – buying $5-billion (U.S.) of preferred shares. But not just any preferred shares. These have a dividend yield of 10 per cent. If Goldman buys back the preferred shares when its financial situation is more stable, it must pay a 10 per cent premium to Mr. Buffett.
As well, Mr. Buffett was given a warrant, which allows him to buy $5-billion of Goldman Sachs common shares at $115 any time over the next five years. With the shares trading at about $129 on Wednesday morning, Mr. Buffett already has a paper gain of more than $600-million on his investment.
“Thirty-six months ago, Goldman issued perpetual prefs with a 6.2 per cent interest rate, with no common share purchase warrant. But being Mr. Buffett, his near term return profile looks to be five times that level,” Mr. McQueen said. “How can a retail investor keep up with that?”
The deal might be even sweeter, in terms of its risk to Mr. Buffett – or lack thereof. Barry Ritholtz, who writes The Big Picture blog, suggested that Mr. Buffett likely received assurances that his investment was more secure than, say, Lehman Brothers or Bear Stearns, which were allowed to go bust.
“What do you want to bet me that Warren asked for – and got – a very serious promise from Bernanke & Paulson that Goldman would under no circumstances be allowed to tank like Lehman?” Mr. Ritholtz said.
In other words, you can follow Mr. Buffett, but don't expect the same returns. Perhaps investors have already learned this lesson. Goldman Sachs shares traded at $129.64 on Wednesday, up $4.59. That's a decent bounce, but hardly spectacular.
