Warren Buffett is no Buy Indicator

Warren Buffett is excellent at buying under-valued businesses.  What you have to remember is that what he does is not what you can do.  For the most part, he started very young in managing money for other people and making them wealthier.  If you think he invested his own money, as you would, and everyone else just jumped on board because of his personal success, you are making a mistake.  He is a manager of other people’s money and he has earned his share over the years.  Still not bad, but realize that his only ability is persistence of vision.

Warren Buffett gets the news headlines today because of his investment in special shares of Goldman Sachs.  This is NOT a signal for everyone to jump in the market, although the Media seem to think it could be.  He does not know if the markets will go up or down from this point.  He just knows that he can suddenly purchase special shares of a previously unavailable ownership position, that have recently become indirectly assured by the full faith and credit of the Federal Government.  Remember, Goldman Sachs also just cut a deal with the Fed and Treasury by working with Paulson, who used to work at Goldman.  So think in terms of how this deal benefits them, and not that it signals a great buying opportunity in the markets.  Yes, Buffett is buying cheap, but the rest of us cannot make a similar purchase. Personally I just don’t have $5Billion to invest, do you?  If you choose to invest, and the market then drops 20%, you are likely to be unhappy, but Warren will still have made a good deal.

The benefit to the Fed/Treasury (Paulson) is that they have just gained a new buyer of Treasuries and Bonds which foreign entities have not been buying like they used to.  The Fed needs to sell bonds to increase reserves.  In return, Goldman Sachs, Morgan Stanley, and other “New Deal-Part 2” banks receive FDIC insurance on deposits, deep pockets to borrow from, and now have a Federal mandate to do business within certain terms.  In this, they have the ability to create a new economy of scale that makes the risk taking portion of their business models look less risky.  Warren Buffet gives them a news worthy headline to make them all look good because most people do not understand what he is really buying. Buffett gets a permanent expectation on the performance of the money, and because of the deal with Paulson he does not have to worry about risk with Goldman Sachs.  In a way, Buffett has made a deposit to the Treasury.

How does this affect you?  It really doesn’t.  It is just one symptom of the new economy the Government and Bankers are putting together.