Why Warren Buffett invested in Goldman Sachs

Was Buffett making a mistake? Should he have waited till a final decision on the bailout plan was taken?

On September 24, Goldman Sachs announced that it had reached an agreement to sell $5 billion of perpetual preferred stock to Berkshire Hathaway in a private offering. The preferred stock has a dividend of 10% and is callable at any time at a 10%premium. Berkshire will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five-year term.

So, why would the world's greatest investor invest in Goldman Sachs, given that the other investment banking giants on the Wall Street have bitten the dust and fallen by the wayside, so to speak?

Obviously Warren Buffett practices what he preaches. His strategy to buy stocks whose prices have been driven down due to fear is very evident in his latest move. Wall Street is in the grip of unprecedented panic and stock prices have plummeted, even those of one of the world's most prestigious banks like Goldman.

"Be fearful when others are greedy. Be greedy when others are fearful," Buffett has often said. Buy when people are selling and sell when people are buying. His investment in Goldman Sachs stems directly from this investing principle of his.

Buffett's investment in Goldman not only boosted the bank's confidence, but also that of investors worldwide. Essentially, Buffett's investment is an endorsement of his faith in the stability of America's financial and banking system.

It is also his way of saying 'yes' to the $700 billion bailout plan that has been criticized by many a taxpayer, economist, and politician.

That his decision to invest $5 billion in Goldman was right was proven within hours as Buffett made a notional profit of $783 million (over Rs 3,620 crore) no soon than the deal was made.

So let’s have look at who is actually this person???

As a young boy, Buffett, the son of a stockbroker, always yearned to make more money. He started making pocket money by delivering newspapers.

When he was just eleven years old, Buffett bought his first stock. He purchases 6 shares of Cities Service preferred stock: 3 shares for himself, 3 for his sister, Doris, at $38 per share. The stock fell to $27 but went up to $40. Warren and Doris sold their stock for a small margin. Immediately after that, the stock zoomed to $200 per share, much to his disappointment. That's when he learnt a very important lesson in life: Patience pays!