Believe It Or Not There Are Still Good Investments Out There

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.

9 comments

  1. Yes, Warren Buffet seems to think Goldman would be a nice addition to his portfolio. Interesting that he would take a 5 billion position when he has exposure to the insurance industry himself. I guess Geico may not have exposure to home foreclosures. It’s hard to bet against the Oracle of Omaha in this market.

  2. Just listening to “Uncle Warren” on CNBC the other morning makes an investor not feel so bad about all the negativity in the media of late. He has a way of making us think logically about the situation and understand that not all businesses will fail, simply the weak.

  3. Great post, thanks for highlighting value investing fundamentals.

    I think the Goldman deal should be viewed with a grain of salt, though, since even Buffett isn’t confident enough to buy common stock and take the risks facing a retail investor (read: you or I). Not to say that GS is not a good value, but there is a fundamental shift in the industry and we won’t know the long-term ramifications for a while.

    His $5B is in preferred stock with a 10% dividend, plus warrants to buy $5 billion of common stock with a strike price of 115 a share. That means that should Goldman go bankrupt, he gets paid before the common stockholders (but after the debtholders).

    While it looks good on paper, he’s got a whole lot more money to play with, and he’s getting a better deal than any of us ever could. So just proceed with caution– my 2 cents. 🙂

  4. Trophy,
    There is no doubt that Buffett stuck a better deal than any retail investor ever could. However, many of the “troubled” banks have strong balance sheets and are well positioned – but just happen to be grouped together in a struggling industry.
    I urge all to look at the Canadian banks such as BNS, TD, and RY. They are well capitalized and the regulatory requirements in Canada will shield them from a disastrous meltdown as seen in the USA. Just my $0.02!

  5. Agree with you that GS is a much stronger buy than other US banks, although I think the positive reaction takes into account their liquidity (courtesy of their newfound ability to borrow at the discount window), and hence, ability to continue operating through the market turbulence, more than the strength of their balance sheet. Great rec on the Canadian banks, btw. Esp for the younger generation who can withstand the current volatility, it’s a great buying opportunity if you do your homework and get in at the right price.

  6. I am a recent graduate with no stock portfolio but see the logic in investing while the markets are low and have faith that they will pick up again. Now would be a great time to start up a portfolio. How much longer do you think the markets will continue to fall and when would be the best time to make these investments? Aside orm the Canadian banks, what are some smart domestic investments?

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