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Is Warren Buffet Still an Oracle?

By Edited Jan 5, 2016 0 0

Last year about this time, Warren Buffet made headlines when he invested $5 billion in Goldman Sachs and $3 billion in General Electric within a few short weeks of one another in the midst of the worst financial crisis in decades. He even wrote an op-ed piece in the New York Times entitled, "Buy American. I am." on October 16, 2008. There he repeated his investment philosophy of being greedy when others are fearful. As we approach the one year anniversary of this unprecedented investment, let's look at the results to determine if Warren Buffet really is deserving of the moniker, "Oracle of Omaha."

Warren Buffet's $5 billion investment in Goldman Sachs was announced on September 23, 2008. In exchange, he will receive preferred shares that carry a 10% dividend forever until Goldman Sachs decides to buy them back at a 10% premium. That means that this past year, Buffet has earned $500 million in dividends. He also received warrants to purchase another $5 billion shares of common stock at a price of $115 per share. Today, on September 15, 2009, Goldman Sachs common shares closed at 176.66. That means that if Warren Buffet wanted to buy the shares and sell them on the open market, his $5 billion investment would be worth $7.68 billion. So, on his Goldman Sachs investment, Buffet is sitting on a profit (realized and unrealized) of $3.18 billion so far. That is certainly a nice return for one year.

Now, let's look at the General Electric investment. Warren's deal with GE is structured in a similar fashion to his Goldman investment. In exchange for $3 billion, Buffet receives perpetual preferred stock with a dividend yield of 10% that GE can call after three years for a 10% premium. That means that he is guaranteed to receive a minimum of $900 million in dividends over the three year period plus an additional $300 million should General Electric desire to buy back the preferred stock. Furthermore, he received warrants to purchase $3 billion of common stock at a price of $22.25 per share. GE stock closed at 16 today so these warrants are currently worthless. So far, the return on this investment is limited to the 10% dividend.

If we add it all up, Warren Buffet invested a total of $8 billion at the time, and one year later that investment has yielded $800 million in dividends and $2.68 billion in capital gains provided he spends another $5 billion to buy the common stock of Goldman Sachs. That totals $3.48 billion on a $13 billion total investment which is a 26.7% annual return. I would say that qualifies as oracle material.



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