It's ironic that it took a short-term gain for some to reassess long-term-focused investing guru Warren Buffett.
On Friday, The Wall Street Journal's Deal Journal blog posted this headline: "Buffett Regains His Cred With Goldman Surge." The headline refers, of course, to Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) $5 billion preferred stock investment in Goldman Sachs (NYSE: GS ) back in September.
The deal gave Berkshire $5 billion worth of preferred stock in Goldman that paid a whopping 10% annual dividend along with warrants to buy $5 billion in Goldman stock at $115 per share. With Goldman's share price over $160 today, those warrants are now worth more than $2 billion, and the preferred stock is still paying that sweet $500 million dividend.
How Buffett got his groove back
The investment in Goldman had some people suggesting that Buffett had lost his touch when the shares fell below $50 in November, while a similar investment in General Electric (NYSE: GE ) is still drawing some cockeyed looks because the common stock is trading at about half of where it was when he made the investment. And that's to say nothing of some sniggers over his bullish op-ed piece in The New York Times back in October -- which preceded another 30% drop in the S&P 500 index between then and March.
The Deal Journal's headline, however, referred to a New York Post article about how successful Buffett's bet on Goldman has been. Still, I couldn't help but chuckle at the idea that Buffett had lost his credibility -- or his groove for that matter -- in the first place.
Not that I should be surprised. Most market commentators and many investing "experts" are so focused on the near term that they're ready to draw conclusions from every single frenetic spasm of the market.
But the idea of investing with an eye toward next month -- or even next year -- has rarely (if ever) been Buffett's modus operandi. Going against the grain has bagged him huge returns on investments like American Express (NYSE: AXP ) (yes, he’s still way up) and allowed him to take over companies like GEICO when they're selling on the cheap. He also managed to miss out on massive losses such as those that came storming down during the dot-com bubble.
And though his heavy exposure to financial stocks like Wells Fargo (NYSE: WFC ) , American Express, and US Bancorp (NYSE: USB ) did him no favors during the most recent downturn, the cool $44 billion in cash that he had set aside going into the recession has allowed him to go on a buying spree while stock prices are depressed.
The lesson is clear
None of us really benefits from sitting around talking about how talented Warren Buffett is when it comes to investing. Luckily, we can benefit from learning how he has been so successful.
In the case of Goldman, Buffett did what he's always advocated -- investing in well-run companies with great brands and moats around their businesses, when they're selling at discounted prices, and then sitting on your hands and waiting for the market to come to its senses. Being able to buy preferred shares that common investors couldn't certainly helped, but the core of the investment fit what he's long preached.
Despite the run-up since March, today's market is offering a good number of these Buffett-esque opportunities. In fact, Berkshire itself -- which is trading under its typical 1.5-to-2 times book value -- may be one of them.
However, as smaller individual investors, we can also take advantage of the deals on many smaller stocks that would be of little interest to Buffett because of Berkshire's size. As my Foolish colleagues have pointed out in the past, these smaller companies are often the best opportunities to capture outsized gains. Options broker optionsXpress and refiner Holly Corp. are two of my favorite small caps, but with the market still so beaten up there are plenty of other opportunities that I've had my eyes on.
What stocks do you think would make the best Buffett-type buys right now? Share your thoughts in the comment section below or click over to the Motley Fool's CAPS community and share your picks with 135,000 other investors.
Further Foolishness:
Start investing today – just $7 per trade with Scottrade. Or find the broker that's right for you.
RSS Headlines
Fool UK