At every year’s Woodstock for Capitalists – the Berkshire Hathaway annual meeting – Warren Buffett tells the thousands of assembled disciples that its size has become a serious constraint on performance.
‘[O]ur universe has shrunk enormously. And we’ll not do as well in that universe – remotely as well – as we would if we operated with small sums in a much wider universe and could do all kinds of things … Anyone who expects us to come close to the past should sell Berkshire – because it isn’t going to happen’.
He’s right. But his size and reputation also bring him deals the rest of us could only dream of. Last night’s investment in Goldman Sachs is a case in point. Buffett is buying $5bn of preferred stock paying a dividend of 10% a year. Nothing out of the ordinary in that. But he also gets an option to purchase $5bn worth of ordinary shares at $115 a share – below last night’s closing price of $125.05.
This gives him the best of both worlds. If things go bad, he owns preferred stock which ranks higher than ordinary shares and carries a fixed 10% dividend. But if the stock price recovers from here – the more likely scenario given Buffett is putting his cash on the line – he can simply convert his options into ordinary shares and collect all the upside.
It’s a business he knows well through his involvement with Salomon Brothers in the late eighties and he gets his favourite banker to boot (Goldman’s Byron Trott was described by Buffett as ‘the rare investment banker who puts himself in his client’s shoes’).
All up, a very nice deal. But only available if you have a spare $5bn lying around.