The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Buffett’s Goldman Trade

Not everyone has the skill to bet stocks, or markets, will fall. Most people are more comfortable betting that prices will rise. Placing wagers in the midst of a crisis scares most people. In late September 2008, during the height of the credit crisis, when no one wanted anything to do with banks, Warren Buffett invested $5 billion in Goldman Sachs. At the time, Lehman Brothers, the world’s fourth-largest investment bank, had declared bankruptcy. The U.S. government had taken over Fannie Mae and Freddie Mac, and bailed out American International Group. In a two-part deal, Buffett’s company, Berkshire Hathaway, spent $5 billion on “perpetual” preferred shares that paid a 10 percent dividend. Buffett also got warrants—essentially contracts that convert into stock—to buy $5 billion of Goldman common stock at $115 a share. At the time, the $115 price was 8 percent below Goldman’s $125.05 stock price. The Wall Street Journal heralded the investment as “one of the biggest expressions of confidence in the financial system since the credit crisis intensified early this month.” When Goldman repaid the loan in March 2011, Buffett’s profit totaled $1.7 billion, or about $190,000 a day. It pays to buy fear.