What news we have from Wall Street these days. The government will bail out Fannie Mae and Freddie Mac to the tune of $700 billion or more. Wall Street has temporarily banned short selling !
And while these developments should help calm the markets, everyone is on edge as the finance sector struggles to turmoil, affecting all aspects of our economy. Who would invest in a Wall Street Investment Bank on a day like today?
None other than Warren Buffett , who’s Berkshire Hathaway  (NYSE: BRK-B) is buying a huge stake in Goldman Sachs (NYSE: GS). Now why would they do that this week of all weeks?
Buffett Returns to Banking Sector
The last time Buffett got into the investment banking sector was back in the early nineties, when he had to temporarily act as interim chairman at Solomon Brothers. Seemingly that experience led Buffett to swear off investing in investment banking. But in fact, now is the best opportunity to “buy low and sell high” he must have seen in the sector since that time!
Apparently, the investment in Goldman will be substantially larger than Berkshire’s current long positions in Wells Fargo (NYSE: WFC) and US Bancorp (NYSE: USB), but the trend is clear; Buffett likes the future in banking today! Sure, we all take it as a good sign, but who will follow and how soon does Mr. Buffett expect his investment to pay off?
Warren Buffett Buys Low
Warren Buffett was a disciple of Benjamin Graham  at Columbia. Graham taught ‘value investing’. The value investor looks for securities that are unjustifiably low-priced based on the shares’ intrinsic worth. In other words, he looks for bargains! When he invests in a company, Buffet really doesn’t care whether the market will eventually see its value; he only cares how well that company will do from the prospective of earnings growth. The one follows the other naturally.
Warren Buffett Sells High
When Buffett invests in a company, he isn’t concerned with whether the market will eventually recognize its worth; he is concerned with how well that company can make money as a business. As long as earnings are growing, he holds his position. If earnings growth stalls, he sells.
He isn’t concerned with how popular the stock is or isn’t, but he buys for the longer term and must, therefore, see good things in the banking and investment bank arena right now, despite how unpopular many of these companies’ stocks have become.
Why Is Buffet Braving Banking Again?
So what signs does Berkshire Hathaway see that others must not? Perhaps he’s banking on the fact that the mother of all government bailouts seems to be at hand? Maybe he thinks we’ve seen the worst of the bad news in this sector already and that companies like Goldman Sachs have been unduly treated by the markets when, in fact, their earnings look to promise strong growth?
If you have other explanations, please share your comments, because I’d really like to know what else could motivate Buffett’s crew to go long on GS right now. And, what it promises for the broader markets in 2009!
What is Buffett Thinking about Right Now?
Obviously this means you should go long on financial companies’ stocks now, right? Not! You have to remember that Goldman is in a much different situation than others in the sector and you know that Berkshire’s getting a fairytale of a deal that you can’t possibly get. They bought special issue preferred shares with warrants AND they can increase their upside potential without taking on much additional risk.
Nevertheless, it’s clear that Buffett’s first large deal since the credit debacle began over a year ago sends a clear and welcome sign that things may be closer to the bottom and that opportunity abounds for those willing to step up and take some risk just when the media attention and market negativity is at its peak. Remember Warren’s advice to ‘buy the company’ not markets sentiments and hype.