Saturday, October 18, 2008

What Warren Buffett Didn't Say

In the New York Times, Warren Buffett says he's buying American stocks, and he urges others to do the same. His argument for this recommendation is rather vague, saying that over time, stocks will go up, and the time to buy is when everyone is afraid. (Frankly, I think everyone has been afraid for some time now.) Buffett's statement doesn't sit well with some folks, who point out that he has much to gain from improved investor confidence. He's already heavily invested in stocks, and therefore some of his fortunes depend on whether Americans decide to invest themselves and boost (or rescue!) Buffett's investments.

Buffett's editorial is particularly misleading because he fails to mention that his stock investments are often different from those that ordinary people would make. When Buffett buys billions of dollars of stocks, you can bet that he gets a better deal than you or I would.

For his $5 billion investment in Goldman Sachs, Buffett receives preferred shares, which means that if Goldman ever goes bankrupt, he stands ahead of ordinary stockholders in the line to pick up the pieces (assets). Buffett also gets a 10% annual dividend on his shares. (Wouldn't that be nice?) Furthermore, he has the option to buy more stock at a fixed price in the next few years; a no-lose situation for him. Finally, Buffett knows that Goldman has a lot of connections in the US Treasury department, and Obama has mentioned that Buffett is one of his financial advisors. It therefore seems likely that Goldman will be on the inside track to get any further government assistance it may need.

I have nothing against Buffett; in fact he seems to be a rational, no-nonsense investor. I do have a problem with the New York Times editorial he published. I have no idea whether the market is about to rise from its lows, but I am certain that my monthly paycheck won't be able to buy stocks on the same favorable terms that Warren Buffett receives.