Warren Buffett's $10 Billion Financial Crisis Profits

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

An article in Sunday's edition of The Wall Street Journal was titled "Prospect of Long Shutdown Stokes Concern," which is probably as good as any summary of today's stock market action -- or that of the past week, for that matter. The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) both lost 0.9%.

The raised level of concern was more obvious still in the equity options market, with the CBOE Volatility Index (VOLATILITYINDICES: ^VIX  ) popping 16%, to close at 19.41 -- the highest closing value since June 24. The VIX, Wall Street's "fear index," is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.

Berkshire nears the $10 billion profit mark on crisis investments
Sunday's edition of the Journal also trumpets that "Buffett's Crisis-Lending Haul Reaches $10 Billion," in a look at the profits Warren Buffett earned on behalf of Berkshire Hathaway (NYSE: BRK-B  ) through the deals he struck with blue-chip companies during the worst of the credit crisis. That list includes one former Dow component, Bank of America, and the stock that recently replaced it in the index, Goldman Sachs (NYSE: GS  ) .

According to the analysis, last week's $4.4 billion repayment by confectioner Mars of money lent to its subsidiary Wrigley means the total profits on these crisis-era investments is edging close to $10 billion, for an estimated 40% gross return.

Last week, it also emerged that Berkshire will receive roughly 13.1 million shares of Goldman Sachs, worth $2 billion, as the final sweetener on a $5 billion investment in Goldman preferred shares made in September 2008 (the preferreds, which Goldman has already repaid, yielded 10%). Berkshire's new Goldman stock position -- established at no cost -- would rank the conglomerate as the investment bank's sixth-largest shareholder as of the end of June, according to public ownership data compiled by S&P Capital IQ.

Critics often pooh-pooh these results, on the basis that they are strictly the product of favorable terms on deals that only Buffett has access to. However, the Oracle of Omaha himself disputes this in the Journal article, stating flatly that "in terms of simple profitability, an average investor could have done just as well investing in the stock market if they bought during the panic period." According to this view, achieving similar, or better, returns was mainly a function of having cash -- and the right temperament.

It might be easy to dismiss Buffett's retort, if he hadn't told investors to buy stocks during the panic period he refers to. This was no tip whispered to a few initiates, either; instead, he chose the pages of The New York Times to disseminate his recommendation. On Oct. 16, 2008, under a title that suffered no ambiguity -- "Buy American. I Am" -- Buffett wrote:

So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

From the publication date of Buffett's encomium through today, the S&P 500 has produced a 98% gain, including dividends.

Warren Buffett wants you to become a better investor
Buffett's October 2008 "buy" recommendation was valuable, sure, but for years, he's been sharing something that has much greater, more enduring value: the knowledge and insights necessary for investors to identify and capitalize on similar opportunities on their own. Indeed, through the years, Buffett has provided a veritable investing curriculum to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


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  • Report this Comment On October 07, 2013, at 11:03 PM, EquityBull wrote:

    Actually I have read that had Buffett simply invested in the index at the same time he made each of those aforementioned investments that each one of them would have significantly underperformed the S&P 500 index. In other words those investments grossly lagged the "market". In retrospect these were all poor investments by Buffett if his benchmark is to beat the index itself.

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