Warren Buffett didn't become the legendary investor he is today by thinking, or acting, like a hapless amateur. Although his Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) owns many of the very same stocks that small-time investors across the nation hold, he bought and sold with a strict sort of discipline many of us struggle to mimic. And when and where possible, he negotiated a sweetheart of a deal.
One of his best pickups of this variety is Goldman Sachs (GS 2.36%), effectively scooped up for a song in the midst of 2008's subprime crisis. The Oracle of Omaha was willing to do his part to revive the KO'd financial sector when he saw the federal government was also acting, committing $5 billion worth of much-needed capital to keep the investment bank alive long enough to heal itself.
The catch? That's the brilliant and most fruitful part of the story.
Buffett used all the leverage at his disposal
Most investors can look back now and say the panic was as overinflated as the housing crisis that caused it. In the heat of the moment, though, few investors would have had the guts -- even if they did have the money -- to pour cash into a name trapped in the epicenter of a terrifying financial crisis. But that's why Warren Buffett is affectionately called an Oracle. He sees what others don't.
Image source: Getty Images.
As any investor would have in the environment, however, Buffett wanted a little something extra for the added risk he was taking on at the time. He didn't buy Goldman shares in the open market, nor did he buy shares out of Goldman's treasury of yet-to-be issued inventory. He insisted on, and got, a special class of preferred Goldman Sachs stock boasting a fat dividend yield of 10%. That position ended up netting about a 35% return when Goldman redeemed those preferred shares in 2011.
It was the other, seemingly minor piece of the deal that ended up providing the big payday though. Along with his purchase of preferred shares, Buffett was outright granted warrants to buy 43.5 million common shares of Goldman Sachs at a price of $115 (for a total investment of $5 billion) at any point five years after serving up the initial cash infusion. Five years later, Goldman shares were trading around and even above $160 -- a price some may have doubted was even in the realm of possibilities when things were at their darkest in 2008.
Goldman ended up renegotiating the prospective purchase before Buffett had a chance to pull the trigger, replacing it with terms that were equally fruitful and less complicated for both parties. Instead, Berkshire was granted 13.1 million Goldman shares and $2 billion in cash.
Although never a major position for Berkshire -- it still only accounts for about 5% of Berkshire's value -- it remains one of his top "buy when others are fearful" trades.
Goldman not great for Buffett, but still good
So what was the total return on the trade? That depends on which shares you're talking about, and if you count the exercise of his warrants as a true purchase, and how you count the cash portion of the reworked deal, and whether or not you count Goldman's dividends paid in the meantime. In other words, there is no one right answer to the question. The most meaningful figure for the current GS stake, however, is a market-trailing 36% return on the investment that comes with a huge asterisk.
The renegotiation of his terms with Goldman effectively meant, as fellow Fool Alex Dumortier put it four years ago, "Berkshire received the warrants at no cost," adding that Buffett "modified the terms of the warrants so that Berkshire made no cash outlay when it exercised them." He also sold a 13% piece of his Goldman stake in 2015, only to buy even more shares back in early 2018.
Putting the dealmaking, buying, selling, and cash grant aside though, the bulk of the current $3.8 billion, 18.3-million-share position in Goldman that Berkshire now holds has been established (and at least in one sense paid for) is up only 36% since it was established, trailing the broad market's 85% advance for the time frame thanks to a rather rough 2018.
Data by YCharts.
Adding dividends to the mix pumps up the total return since the latter part of 2013 to a healthier 54% return, though that still trails the S&P 500's comparable figure of 105%. And, while there's no effective way to factor it into the total return, 2013's $2 billion cash grant can't be overlooked as part of Buffett's total return, even if it's not part of the current trade.
The big takeaway
Investors applauded Buffett for his savvy, though some investors were understandably quick to point out that the availability of $5 billion in idle cash gave him an opportunity that's out of reach for most. The point is well taken, too.
Still, the approach that provided that $5 billion was employed largely using the same stocks available to all ordinary investors. He just used time and discipline to his advantage in a way that most investors don't.
Whatever the case, take note that despite multiple chances and a couple of reasons to bail out of the trade altogether, he's been buying. He picked up another 250 million shares in the second quarter of last year and added more than 5 million shares the following quarter -- once again buying what nobody else wanted at the time.
