Buffet's on a spending spree.
He just forked out $3.7 billion to buy a big chunk of G.E.
Earlier in the week, he fronted up a huge $5 billion to be the knight in shining armour for the boys at Goldman Sacks.
So what does “the Oracle of Omaha” know? …and does this herald the bottom of the market …as well as guaranteeing that the bail-out plan will get passed tonight?
Well, let's have a closer look at this…
I don't know what the deal with G.E. was yet, but let's analyse the Goldman Sacks deal and see whether you can do something similar?
First, you can't buy the kind of stock that Buffet got in the market anywhere in the world. Buffet bought $5 billion of perpetual preferred stock with a 10% coupon.
These shares are senior to Goldman's other preferred stock. Which means that no other shareholder will receive any dividends until Buffet is paid his 10% in full each year.
That's not all.
Buffet's deal also included a long-term call option that entitled him to buy $5 billion in regular stock at $115 per share. Goldman is trading at about $130 now.
He's bought seriously wholesale in a market that has been smashed. So in 3 years time or 5 years time, if Goldman is trading at $200, Buffet can go in there and buy $115, making an absolute killing.
I don't expect you to be an expert when it comes to Options, so I'll give it to you in layman's terms.
The value of an option to buy stock in the future at a fixes price is based almost entirely on the duration of the option. The further out you go in time, the more valuable they become. Right now, the only similar options you can buy on Goldman are $120 calls that expire in January 2011 – about two and a half years from now. These options would cost you $42 to buy today.
Talking to some of my option-trading mates, they estimated the options Buffet received are worth about $78 each.
So in other words, Buffet received a security worth $3.2 billion in exchange for his $5 billion investment. His net exposure of $1.8 billion.
Quick calculation on his cash flow on his $5 billion investment and 10% equals $500 million a year income. That's a 27% return on his $1.8 billion exposure. (The rest is protected by his options).
So my friends, the long and short of it is that you and I will never get access to a deal like this in a million years.
So don't go out tomorrow and buy investment banks like Macqaurie and Babcock and Brown. Unless of course you want to hold them for 3-5 years.
The lesson here is that Buffet was cashed up and he was predicting that the banks were going to come crashing down for at least 3 years… Patiently waiting on the sidelines to strike when the time was right.
So whilst you can't be Buffet, you should be totally immersed and watching what is going on right now in the markets, regardless of whether you've got any money or not.
This will prove to the greatest buying opportunity in your lifetime.
…But hold you horses, be patient grasshopper. You may be a little bit early and regret it in the short term.
Take a leaf out of Buffet's book and wait. Your chance will come very soon.
P.S. Here's something interesting most people don't know… Buffet gave his good ol' mate, Billy-boy Gates $37 billion for his charity/foundation. So what do you thing Bill did with a large chunk of cash like that..?
Well, he's no dummy. He looked around for a good place to invest the $37 billion. Do you know what he invested it in..?
He bought shares in… Berkshire Hathaway. Hmmmm… Isn't that interesting?
Where do you think Buffet has come up with all the cash to go on a spending spree?