By Erik Holm
Sept. 24 (Bloomberg) -- Billionaire investor Warren Buffett, who tells investors to be ``greedy when others are fearful,'' put up $5 billion for Goldman Sachs Group Inc. after the firm lost 40 percent of its market value in the past year.
Buffett's Berkshire Hathaway Inc. is buying a stake in Goldman after three of the investment bank's biggest competitors went bankrupt or were forced into emergency sales. He has already agreed to spend at least $25 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire.
``When the price gets right, you have to get in,'' said Gerald Martin, a finance professor at American University in Washington who has studied Buffett's investment history. ``The pendulum may finally have swung too far the other way.''
Buffett, 78, has frequently scolded Wall Street for shoddy accounting and risky investments. By taking a stake in New York- based Goldman, he's investing in the most profitable U.S. investment bank a week after the Lehman Brothers Holdings Inc. went bankrupt and Merrill Lynch & Co. sold itself to Bank of America Corp.
Berkshire will buy $5 billion in perpetual preferred Goldman shares that pay 10 percent interest, and will receive warrants to purchase $5 billion of common stock at any point in the next five years, according to a statement from Goldman yesterday.
``It's a deal that will be quite lucrative for Berkshire Hathaway shareholders,'' said Michael Yoshikami, the president and chief investment strategist for YCMNet Advisors in Walnut Creek, California, which manages $1 billion, including Berkshire shares. For financial firms, ``this suggests the world is not coming to an end.''
Checking His List
Goldman rose $4.45, or 3.6 percent, to $129.50 at 7:48 a.m. in early trading in New York. The Buffett deal was announced late yesterday. Berkshire has risen 10 percent in the past year.
Buffett's standards for choosing where to put Berkshire's money emphasize companies with what he considers strong managers and a market-leading franchise. He has put more of Berkshire's money to work in the past nine months, after complaining last year that he couldn't find anything big enough to buy.
Berkshire has announced nine acquisitions since October, compared with six in the prior 12 months, when his largest deal was a $350 million purchase of an underwear and pajama company.
This year, the deals have included the $4.5 billion purchase of Marmon Holdings Inc., the Pritzker family's collection of 125 companies, completed in March, and a $4.7 billion bid this month for Constellation Energy Group Inc., the largest U.S. power marketer.
Buffett provided $6.5 billion in April to help Mars Inc. buy Wm. Wrigley Jr. Co., a deal that gave him a stake in the chewing gum maker. He pledged $3 billion in July to Dow Chemical Co.'s $15.4 billion takeover of Rohm & Haas Co. By midyear, his cash holdings had declined to $31.2 billion from $44.3 billion at the end of 2007.
Berkshire has bought $6.5 billion in auction-rate securities since December after the market froze. Yields for the debt rose as investors found themselves unable to redeem the securities. Dealers that ran the periodic bidding to determine interest costs stopped supporting the auctions.
The Goldman investment puts Berkshire back in an industry Buffett has mostly shunned since 1997, when Salomon Brothers was sold to Travelers Group. Buffett helped the firm fend off an unwanted takeover in 1987, only to see the New York securities firm trail every U.S. stock index for the next decade.
Buffett has credited Byron Trott, a Goldman banker, with helping Berkshire complete at least four acquisitions, including the Marmon deal.
`Where the Money Is'
Trott ``understands Berkshire far better than any investment banker with whom we have talked and - it hurts me to say this - earns his fee,'' Buffett wrote to shareholders in Berkshire's 2003 annual report.
Buffett has sometimes been critical of Wall Street, saying at a news conference in May that the industry is ``going to go where the money is and not worry about consequences.''
The Salomon experience hasn't damped his enthusiasm for financial companies, with Wells Fargo & Co., American Express and U.S. Bancorp counted among Berkshire's 10 biggest holdings. His company is the No. 1 stakeholder in all three.
Buffett's investment decisions are often imitated by mutual funds and individual investors in an attempt to duplicate his success, and a study by Martin in 2007 found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500.
Berkshire spokeswoman Jackie Wilson didn't return messages seeking comment.
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