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Warren Buffett Just Dumped Goldman Sachs -- Here's Why I'm Not Selling

By Matthew Frankel, CFP® – Updated May 19, 2020 at 9:12AM

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The most notable stock sale in Berkshire Hathaway's first quarter caught many by surprise.

Berkshire Hathaway's (BRK.A -0.72%) (BRK.B -0.59%) stake in investment banking giant Goldman Sachs (GS -2.32%) originated from a savvy investment CEO Warren Buffett made around the time of the financial crisis. In exchange for providing $5 billion of capital to the investment banking giant in 2008, Berkshire received preferred shares paying a 10% annual dividend, plus warrants to buy $5 billion of Goldman's common stock at $115 per share.

Well, after a negotiated deal in 2013, Berkshire's warrants were converted into about 13 million shares of Goldman, which is how the stock found its way into Berkshire's portfolio. Since that time, Buffett has sold and added to the stake, which sat at about 18.3 million shares as of the third quarter of 2019.

View down Wall Street at sunrise.

Image source: Getty Images.

Recently, however, Buffett appears ready to take his profits and move on. In the company's first quarter 13-F filing with the SEC, Berkshire revealed that it had sold 84% of its Goldman shares, and that is in addition to the 34% reduction Buffett made in the fourth quarter.

Now, Goldman Sachs isn't even close to being one of Berkshire's largest investments. The conglomerate still holds about 1.9 million shares of the investment bank, a stake worth $297 million -- a rather small investment by Berkshire's standards. In fact, Berkshire now owns stakes in nine other bank stocks that are all more valuable than its Goldman investment.

Why did Buffett sell Goldman?

We don't know why Buffett decided to pull the plug on Berkshire's Goldman Sachs investment. Warren Buffett typically doesn't discuss his specific reasons for buying or selling specific stocks (with a few exceptions, such as the recent airline sales).

That said, it does seem like Buffett feels the need to take some risk off the table, given the current environment. Buffett's recent comments indicated that he no longer believes the airlines have an acceptable level of risk to merit an investment in Berkshire Hathaway's portfolio, and he may feel the same about Goldman. After all, the bank has some revenue streams that can be rather volatile, such as trading, and the bank has a substantial portfolio of equity investments of its own.

Why I'm not going anywhere

In a nutshell, I have absolutely no intention of selling my Goldman Sachs shares anytime soon, even after learning that Buffett is moving on.

For one thing, Goldman's business is actually set up to do quite well in turbulent markets. Trading revenue tends to pick up and underwriting and M&A advisory businesses can have quite an active pipeline of business.

Goldman also has relatively low consumer and small business loan exposure compared with most other U.S. banks. We've seen most major banks set aside billions to cover anticipated loan losses if the recession is worse than expected, and Goldman should be less susceptible to consumer pain than most.

Finally, speaking of the consumer side of the business, Goldman Sachs still has massive potential to grow its consumer banking products. There is a "main street" investment platform as well as an online checking account that are reportedly in the works, and there are several other consumer products the bank can build. Goldman has the unique competitive advantage of a strong and established brand name, while also not having a legacy branch infrastructure to worry about.

To sum it up, Goldman should be well positioned to make it through the pandemic in relatively strong condition, and its consumer banking business could be a massive driver of growth. With the stock trading for a 25% discount to its book value, Goldman isn't a low-risk stock, but the upside potential seems to be much greater than the downside risk.

Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares) and Goldman Sachs. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Goldman Sachs Stock Quote
Goldman Sachs
GS
$307.56 (-2.32%) $-7.31
Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
BRK.A
$421,129.99 (-0.72%) $-3,050.01
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
BRK.B
$278.83 (-0.59%) $-1.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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