Buffett's biography: is Goldman Sachs the new Salomon?
Posted on 27 December 2008 with no comments from readers
Warren Buffett’s official biography, ‘The Snowball’, does not reveal a great deal that was previously unknown about the world’s greatest investor who has always played his cards close to his chest.
But it did contain plenty of references to his failures as well as his huge successes, and is about as fair and balanced as any official biography. The danger with unofficial tomes is that they go to the other extreme and make unsubstantiated allegations that are hard to evaluate. Thus this work on Buffett is probably as close to the truth as we will get.
However, if I wanted to add something to update this seminal book – perhaps in the guise of an unofficial biographer looking for a newspaper headline – I would have to compare his 1986 acquisition of Salomon Brothers with his recent investment in Goldman Sachs.
Error or brilliance?
Both investment banking acquisitions were completely out-of-line with normal Buffett thinking, except the mantra to buy when stock prices are low. Both institutions were stuffed with derivatives, products Buffett has described as ‘weapons of mass wealth destruction’. Both employed legions of highly paid staff with huge bonuses. Both had performed brilliantly in a Wall Street boom and Salomon’s star slumped after a crash.
In the case of Salomon, Buffett was forced to spend one of the most miserable periods of his business career sorting out the firm’s problems, before achieving something that perhaps only he could have done: getting his money back.
Do great investors tend to repeat their mistakes? It would be nice to think that the master of them all learned his lessons. But I wonder.
Margin of safety
Is the margin of safety provided by the high coupon exacted from Goldman sufficient to compensate for the plunging share price and dismal outlook for profits in the worst recession since the Second World War, while the former investment bank turns itself into something different during a Wall Street slump?
At the very least you have to wonder if the former giant of Wall Street has not shed its profit engines by dropping investment banking. Has Buffett again been seduced by former glory as he was by the past performance of Salomon? Will Goldman Sachs prove a firm with more depth?
Goldman Sachs has been characterized as the biggest hedge fund of them all, and you just have to wonder how a firm that has based its performance on leverage will perform in markets that are deleveraging. Perhaps it has a new strategy and Buffett has got it right this time.
Poor Susie
Elsewhere, I could have done without an agonizing description of the last days of the late Mrs. Buffett. This did show the human side of the incredible compounding machine, but I am not sure this is how this apparently generous and kind woman should be remembered.
The opening chapter on the Sun Valley 1999 conference and Buffett’s prediction that stock prices would move sideways – albeit with some major ups and downs – until 2016 was sobering, if only because it made you wonder why he recommended buying last October amid the carnage on Wall Street.
Buying on the dips could indeed be justified, and a rally has followed, but there seemed a logic to the original 1999 prediction that suggested US stocks were not necessarily the place to be in the future. That has also turned out to be highly prescient, and if you are taking a long-term view of investments highly relevant.
Silver again?
We heard very little about Buffett’s huge and successful investment in silver a decade ago – even Berkshire Hathaway stockholders were not told until long after the silver was sold at a profit. Might he be leaning in that direction again?
Well if he could venture into investment banking for a second time after the Salomon debacle, history could repeat itself, and silver would be an excellent leverage against a coming gold price hike driven by inflationary bailouts and stimulus packages. Silver stocks might do even better!
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