In Focus: Buffett Sells a Bank
Updated: Aug 16, 2020
As I was scrolling through Twitter looking for something interesting to read to feed this column I the same tweet headline popped up back-to-back-to-back-to-back. Buffett's decreased stake in Goldman Sachs was the headline of tweets appearing on my feed. Whoa! That is a big deal and worth a tweet. It's also insight into how bad Mr. Buffett sees things getting from here forward.
In 2008, when the world's financial system was falling apart, Warren Buffet invested in Goldman Sachs. Berkshire Hathaway purchased $5 billion of Goldman Sachs preferred stock. The purchase also included warrants to purchase $5 billion of Goldman Sachs common stock at $115 per share. The warrants came with a five year expiration date, and the investment paid a 10% dividend. It wasn't a bad deal for Berkshire Hathaway and Warren Buffett. To me it's one of his best deals ever.
That deal wasn't made on blind-faith in the Goldman Sachs' name and brand, or their financial and intellectual capital, all of which Buffett pointed to for making the deal. Buffett made it clear that his faith in a financial recovery was contingent on the $700 billion bailout being discussed by congress at the time.
Buffett's dealings with Goldman Sachs took place around September 2008. In October 2008 congress approved the $700 billion bailout. At the time of Buffett and Goldman's union, Goldman's common stock was trading at ~$128 per share. Five years after the deal the stock was ~$156 per share. But it wasn't a slow grind from $128 to $156, the months following the deal GS traded down to ~$53 per share. But when it was all said and done it was another win for Buffett and Berkshire Hathaway.
There is a Warren Buffett quote that comes up time and time again about being fearful when others are greedy and greed when other others are fearful. He did put that strategy into practice in 2008. With the financial system melting down before our eyes, and so many people unsure of how banks and the banking system would look after the Great Financial Crisis, Buffett bought a bank, or an investment bank to be more technical. It's tough to make an apple-to-apples comparison today, because unlike the financial crisis, which was seen as the doing of greedy financial institutions, there is no publicly traded fat cat to blame for COVID-19.
So now in 2020 Buffett is cutting his Goldman Sachs position, what does that say to the markets? I can't speak for the markets, but it tells me that unlike 2008, Buffett doesn't believe that government stimulus will help the financial industry in the short run. It tells me he's fearful of a United States that operates in a negative interest rate environment. It tells me he is fearful of a larger economic downtown than the administration wants to believe.
In Peter Lynch's investment playbook "One Up Wall Street" he discusses when insiders sell their positions. A CEO, CFO, VP, or any other important executive selling shares in the company they work for is a red flag to Wall Street. Investors treat an insider sale as a warning that the company is no good or heading for troubled waters. Lynch wrote that insiders sell for numerous reasons, and that we shouldn't take anything away from the insiders selling. In reality, it could be as simple as the insider is selling stock to pay for a kids education, or treating themselves to the yacht or sports plane they've always wanted, or even looking to upgrade their living quarters. Lynch tells investors to focus on when insiders buy their own stock, because an insider would only buy if they felt the stock price would go up in the future.
Buffett isn't a Goldman insider, but we view him as connected, and because he's connected maybe we're reading too much into his Goldman Sachs sell. As Peter Lynch wrote, insiders sell their positions for several different reasons, and this could be true for Warren Buffett as well. He could just need the money. (I'm laughing from that last line).
Still, my thoughts are on being fearful when everyone else is greedy. We've witnessed markets make an amazing rise since late March, as investors put their faith in the Fed with a strong belief that the Fed will prevent an economic depression. Investors have gotten greedy since late March, and maybe that is why Mr. Buffett is so fearful. What also makes Buffett's sell more interesting is that during the week billionaire investors Stanley Druckenmiller and David Tepper both emphasized that the markets are overvalued at the current levels, David Tepper calling it one of the most overvalued markets he's seen, behind only '99, which was the markets run up to the dotcom bust.
I believe it would be wise for any market participant to take Buffett's move and Druckenmiller and Tepper's opinions into consideration. I mean they did gain their wealth by navigating the markets. I believe they are telling us, without telling us, the future of the economy looks shaky, and we should all be a bit fearful.
Thanks again for checking out In Focus, stay safe!