At least one of Buffett's big bets from last year is paying off. The lessons are clear.
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 $5 billion preferred stock investment in Goldman Sachs 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 shares 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 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 piece in The New York Times back in October -- which preceded another 30% drop in the US 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 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 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. 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 share 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 that common investors couldn't get their hands on certainly helped, but the core of the investment fits 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 Hathaway 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. These smaller companies are often the best opportunities to capture outsized gains. With the market still so beaten up there are plenty of shares I've got my eyes on.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who has an interest in Berkshire Hathaway.
