During the depths of the financial crisis, Warren Buffett plunked down $5 billion dollars on Goldman Sachs (NYSE:GS). It’s reported that this investment has returned nearly $4 billion as some sense of normality has returned to Goldman’s valuation.
Also during the financial crisis, Warren Buffett sold put options on the S&P 500. A put option is a contract that allows an investor to buy or sell an asset at a certain price on or before a specific date. So when Buffett sold put options on the S&P 500, he agreed that if the S&P 500 falls below a certain level, he will pay out.
Reports are that Berkshire Hathaway could be dinged for as much as $63 billion if these put option contracts go against Buffett. But it’s also reported that Buffett took in $9 billion when he sold the puts.
Now, options are derivatives. And you may recall Buffett saying that derivatives were “financial weapons of mass destruction.” That’s an outright condemnation of the risks taken on by investment banks, like Goldman Sachs.
If you’re starting to see some, um, inconsistencies in Warren Buffett’s investments, well, you’re not alone.
But I want you to know that I come not to bury Buffett, but to praise him.
I’ve discussed before the concept of “talking one’s book.” That refers to investors who express an opinion publicly that’s designed to enhance their trading position, not necessarily offer any real insight or perspective.
My point here is not to dissect how Buffett has “talked his book” in the past. Like I said, unlike Brutus, I come not to bury Buffet.
I want to praise Buffet for the way in which he seeks opportunity during financial market calamities. His opportunism is why he’s been such a successful investor for so long. It should also serve as an example for individual investors. ‘
Now, I know Daily Profit readers are a savvy bunch. I received plenty of emails from you in late 2008 and early 2009 asking if it was time to start buying.
The current sell-off should be viewed as an opportunity to add quality stocks to your portfolio at attractive prices. Does that mean you should rush out now and load up? No. The stock market could have more ground to cover on the downside. The appropriate strategy would be to add to your portfolio in increments, so you can always be ready to take advantage of lower prices.
Did Buffett nail the bottom of the financial crisis when he invested in Goldman Sachs? No, not by a long shot. The S&P 500 didn’t bottom for several months after he invested $5 billion. But he still nearly doubled his money in a short amount of time.
Economists suspected that the homebuyer tax credit was supporting the housing market. So it shouldn’t be a huge surprise that mortgage applications have taken a nosedive over the last couple of weeks.
One way you can judge that the near-term trend for the stock market has changed from bullish to bearish is how investors react to bad news.
In a bullish trend, bad news gets ignored. In a bearish trend, bad news gets magnified. That’s exactly what’s happening today: the news that new mortgage applications dropped to a13-year low is helping to sink stocks again.
TradeMaster Daily Stock Alerts’ Jason Cimpl has gotten his readers into a few downside positions this week. Their position in the ProShares UltraShort Financials (NYSE:SKF) is about to hit a double-digit return in a few short days.
For more on how you can profit with Jason from downsides moves in the stock market, click HERE.