Why Buffett Will Make Out Like a Bandit in This Market Crisis

The Oracle from Omaha gets smart when things get tough.


He may talk like a sailor, but he invests like a wizard. Warren Buffett, the chief executive officer of Berkshire Hathaway, is doing what he does best: trolling Wall Street's bargain bin for quality companies mired in turmoil, then scooping them up for obscenely cheap prices. As such, he's likely to emerge from this market crisis a winner. "Warren Buffett is notoriously accurate when the market is bad," says Gary Hager, founder and chief executive of Integrated Wealth Management in Edison, N.J. "He gets smarter when things are tougher."

Last week's deal with Goldman Sachs was a classic Buffett maneuver. The terms are quite cushy: Berkshire is buying $5 billion in perpetual preferred stock, the shares of which will pay a 10 percent annual dividend, or $500 million per year. Therein lies Buffett's safety net (if a company goes belly up, preferred stockholders stand first in line for dividends and profits). "Remember, he's got a cushion as a preferred stakeholder...so he doesn't lose a penny until all of the money is wiped out," says Bruce Berkowitz of the Fairholme Fund, which has long maintained Berkshire Hathaway as a top holding.

What's more, Berkshire will be able to buy $5 billion of the company's common shares at $115 a pop at any time during the next five years. At that strike price, Buffett's already in a sweet spot: Goldman's shares, which have lost roughly half of their value in a little under a year, closed at $129 yesterday. "If Goldman is the crème de la crème...and if things stabilize, he has access to picking up Goldman really, really inexpensively," says Tom Sowanick, chief investment strategist of Clearbrook Financial in Princeton, N.J., who thinks the play will come to fruition within a year. "He's an astute long-term investor; everything doesn't always work out for him, but the majority of the time, it does."

So why Goldman? In an interview with CNBC last week, Buffett explained: "We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check." It helps that Goldman is a blue-chip investment bank with a large global franchise. "If any financial services firm is going to survive, it's going to be Goldman Sachs," Berkowitz says.

Market watchers are heralding the deal as a huge vote of confidence for the financial system. "IBM used to be the market's bellwether," says Hager. "Today, it's Buffett. When he puts some of his money on the table, it should be viewed as a very positive sign."

The Oracle's deal with Goldman is getting most of the attention, but his $4.7 billion takeover of Constellation Energy Group—announced September 18—may be just as lucrative. The price Buffett (or rather Berkshire-owned MidAmerican Energy) is paying—$26.50 a share—is 60 percent below where Constellation was trading at the end of August. For that amount, he'll gain a portfolio of nuclear plants, traditional coal-fired plants, and a public utility, among other bits and pieces.

And that may not be all the value-hunting maverick has up his sleeve. As Hager, who thinks Buffett will double—or even triple—his money within two years, says: "There's things he's doing in the background that we're only going to find out in a few months."

Buffett, Warren
Berkshire Hathaway
stock market
Wall Street
Goldman Sachs