Goldman Sachs started life in 1869. It’s come a long way since. Today it’s a massive global investment banking and securities firm providing financial advice on mergers and acquisitions, underwriting and wider asset management working with Governments, organisations and individuals. The business employs over 30,000 people and has assets measured in the kinds of billions that still make people take notice. 

‘A billion here, a billion there, and pretty soon you are talking about real money’.

             Senator Everett Dirksen 

Yet despite its size, Goldman Sachs was not immune to the economic chaos of 2008 and beyond and found itself seeking assistance from the Troubled Asset Relief Program (TARP) to the tune of $10 billion. The world’s greatest living investor also become involved at that point, investing $5 billion during a time when many investors wouldn’t have touched it.  

This was classic Buffet. 

1.     An All You Can Make Buffet

Warren Buffet is not known for making dumb investments, so when he provided a $5 billion loan to Goldman Sachs in September 2008 investors across the world watched curiously.

This loan made by Buffet through Berkshire Hathaway is yielding a return of $500 million a year. Warren Buffet is a wizard of contrarian value investing.

2.     If You Don’t Know What You Are Doing Don’t Do It

Warren Buffet knew what he was doing.

An experienced customer of Goldman Sachs, Buffet was aware of the quality of its management, the value of its assets and the likely future potential for the firm. He would also have been aware of the capacity for controversy in dealing with Goldman Sachs at that time, and will have considered the potential for reputational damage.

For Buffet watchers across the world, this move will hardly have been a surprise. Far from an odd couple, the relationship was an obvious one. The risk to reward ratio was attractive enough for both parties to proceed. Both could see the money when others couldn’t.

3.     Show Me The Money

Warren Buffet and Berkshire Hathaway have built their business on their reputation, and whilst Buffet has conceded that Goldman Sachs has tarnished its reputation of late, the billionaire investor known as the sage of Omaha has been fiercely protective of his investment in Goldman Sachs and the quality of its management. They have certainly developed a proven track record in making lots of money in good times and bad.

At a time when most investors were in a panic and confidence was low in Wall Street and financial markets, the investment by Buffet in Goldman Sachs seemed like a reckless vote of confidence in what might have been a financial dinosaur.

Buffet could see the financial and intellectual capital, and it was priced to sell. Note that when Warren Buffet looks like he is taking a risk, it usually only seems that way.

Jamie E Smith is the author of Making Money From Stocks And Shares

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