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September 26, 2008
Buffett Turns USD Absolutist
Two business days after the largest government bailout package in history was proposed arguably the greatest investor ever, Warren Buffett, purchased a massive stake in Goldman Sachs. These two events alone represent the makings of an enthralling book. However, what we do not know is exactly how the story will end.
Needless to say, we do know that the world’s greatest investor is going to make money on his new Goldman position; we know this because of his successful investment record and also because, according to Buffett, the two most important rules when investing are 1) Never Lose money, and 2) Never Forget Rule #1. It it unlikely, to say the least, that Buffett is going to wind down his career by forgetting these rules.
But what we also know is that however opportunistic Buffett’s Goldman position was – and boy was it - it also seems to contradict many of his previous stances. Recall that Buffett is the man that famously called derivatives ‘financial weapons of mass destruction’, he (as recently as March) said that many investment banks had become too large to effectively manage, and he is an outspoken critic/investor against the fundamentally unsound U.S. dollar. With evidence that the derivatives time-bomb may be exploding, investment banks crumbling, and the U.S. dollar not exactly on sure footing ahead of what could be the largest printing experiment ever known, these contradictions linger…
Buffett Already Won The Waiting Game
If Buffett’s Goldman position is completely unhedged (it is not unreasonable with the points involved to speculate that Buffett has adopted a hedge), the media will have a field day if the bailout package doesn’t pass and/or another Great Depression negatively impacts Buffett’s Goldman position. Moreover, if the derivatives mess turns into a lasting nightmare and/or the U.S. dollar crumbles as foreign investors panic, Buffett will be shown little mercy.
But what should not be forgotten even if these events transpire is that Buffett did make a quality investment choice earlier this week. To be sure, while many savvy investors tried to buy a bottom in late 2007 only to have their heads handed to them, Buffett waited. When the historic Bear Stearns’ bailout sent the buy crowd into a frenzy and nearly everyone started calling for a bottom, Buffett waited as two more historic bailouts arrived in Freddie/Fannie and AIG and a historic bankruptcy in Lehman. In short, Buffett waited to buy until the financial system seized, most of the supposedly savvy investors starting running to cash and gold, and the U.S. government finally stopped playing with bazookas and brought out their atom bombs.
What was Buffett specifically waiting for? Until Goldman called him with an offer to lucrative to refuse.
But Don’t Forget Rule Number Three
To reiterate, we all know that - failing the complete annihilation of the U.S. financial system - Buffett is going to make money on Goldman. But what we do not know is how much money Buffett will make on Goldman compared to other things. In other words, even though he didn’t forget Rule #1 there remains the possibility that Buffett’s circle of competency turned into single line of complacency as he ignored Rule #3. For those of you unaware of what #3 is, I am divulging it’s contents for the first time here today:
3) Losses or gains in money are relative.
The lingering contradiction remains Buffett’s apparent reverence of King USD.
Buffett’s Balance sheet
As a side note, it should be noted that at the end of June Buffett’s Berkshire had only $28 billion in cash and equivalents (not including $3 billion in Berkshire’s Utilities and Energy and Finance and Financial Products business segments). This represents the lowest cash tally as a percentage of investable assets since the first quarter of 2003 and, given his recent deals, 3Q08 will surely see this figure slide even lower. Clearly Buffett is turning more bullish on equities as he puts more cash to work.
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Not unlike the bottom of bear market in 1974, Buffett still has plenty of cash while others do not, and he is growing excited as other flee. Should the mood strike him, a repeat of October 1974 (quoted below) could soon transpire:
Forbes: ‘How do you feel?’
Buffett: ‘Like an oversexed guy in a whorehouse. Now is the time to invest and get rich.’
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