In investing, as any business, placing substantial value on the opinions or actions of one individual is not healthy. However, when that person is Warren Buffet and the subject is the stock market, ears tend to perk up.
Of course, Mr. Buffet is regarded by many as one of the greatest investors ever. On Tuesday, through his holding company Berkshire Hathaway Inc., he invested US$5 billion in Goldman Sachs, a Wall Street brokerage firm that have been in the spotlight since the fall of Lehman Brothers and the buyout of Merrill Lynch last week.
So why is Mr. Buffet’s investment significant? The financial sector has been crushed by the credit crisis. Canadian financials are down more than 10% so far this year and their American counterparts are off by more than 30%. One of the most unfortunate and irrational consequences has been that many financial companies are being painted with the same brush regardless of the sector of the financial business they’re in (banks, insurance companies, brokerages etc.), how they do business, or where they do business.
The lines between high quality, low quality and no quality have been blurred by continuous negative headlines. Buffet’s massive investment in “Goldman” signifies to many investors that there are still high quality firms within the sector.
There Are Still Strong Financial Businesses
First, Buffet’s investment demonstrates that astute investors continue to focus on fundamentals and valuations despite the emotion that’s driving markets. They understand that confusion creates opportunities to add well-managed, high quality assets to their portfolios at great prices. Case in point – Goldman shares were down more than 40% on the year prior to the Berkshire Hathaway announcement.
Secondly, this is an opportunity to highlight the strength of Canadian banks, which have unfortunately been lumped in with their American peers. Investors should know that unlike their U.S. counterparts, Canadian banks are strongly capitalized and have well-diversified businesses, among other differentiators such as the srtict Canadian governmental regulations that prevent the degree of meltdown that is happening in the United States.
Adversity not only exposes the weakest companies, it can also highlight the strongest. Like Warren Buffet, long-term investors should focus on high quality companies with attractive investment valuations and strong balance sheets. Because when the turmoil ends, and it eventually always does, these firms will be even more valuable and will likely continuing their leadership.