How One Man Did Win Big in the Crisis

This week Berkshire Hathaway’s Class-A stock reached USD 100,000, the first time in 8 months. Berkshire’s Class-A shares are the most expensive on the New York Stock exchange. The stock is now up 40% since its 6-year low in March 2009.

Although last year the book value of Berkshire was down only less than 10%, the stock market punished Buffett brutally and the Berkshire stocks lost 45%. But that was yesterday when many investors (including the majority of professional asset managers) thought the world was ending. Buffett, however, kept his cool. Just shortly after the Lehman meltdown Buffett wrote in a New York Times op-ed “Buy American. I do”. He meant to buy US stocks.

Buffett made a number of very smart moves during the crisis. Most of these actions were quite apparent to the general public. It is, however, curious and sad how only a few wealth managers followed his example, or his advice. Dennis Gartman a well-known financial writer, adviser and CNBC contributor is one example. He commented during the days of crashing markets: “Warren Buffett is an idiot”. He explained that it was inexcusable that Berkshire stock was down 45%. Well, guess who is seen as the fool now?

So what exactly did Buffett do right during the financial crisis?

• Berkshire sold a series of puts on indices like the S&P 500 and the Eurostoxx50. By selling these puts Buffett raked in a premium of USD 4.9 billion. Buffett’s bet was that Berkshire must pay out on those puts only if, on specific dates starting in 2019, these market indices are below the point where they were when he made the deals. The probability that this will happen is extremely low. In the meantime Buffett can make a lot of profit on the premium he received.
  

• Berkshire invested in Goldman Sachs when this venerable investment bank badly needed fresh capital last year. In a private deal Goldman sold Berkshire in September of 2009 $5 billion of perpetual preferred stock. Goldman also gave Berkshire the right to buy $5 billion of common stock at $115 a share and a 10 percent dividend on Berkshire's $5 billion loan. Now the investment shows roughly a gain of USD 4 billion. It is one of Berkshire’s top investments in public companies, made at a point in time when many believed the whole US banking system would crash.
  

• Berkshire has also invested USD 230 million in a Chinese electronics company producing batteries and now also electric cars. The company is named BYD. Since the investment the stock price has gained fivefold. Buffett’s investment is now worth roughly USD 1 billion.
  

• The public stock portion of Berkshire’s portfolio gained more than USD 10 billion overall over the last few months since Buffett had held on to such financial powerhouses like Wells Fargo or American Express who are now “re-emerging”.
  

We don’t know if these profits will decrease somewhat in the short-term due to market fluctuations. What we know is that Warren Buffett thinks long-term and logically. He has been looking only at the fundamentals of companies and business deals for more than 50 years. And he knows that it is the time to buy when others are fearful, while it is time to be fearful when others are buying. A piece of advice private investors and their advisers should take to heart. Because the next boom will come and so will the next panic.