Warren Buffett rarely speaks precisely about what he does, but his actions reveal a great deal about his thought process.
Multibillion-dollar profits in Goldman Sachs and GE demonstrate that Buffett believes an investment should be held for at least five years.
At the height of the financial crisis in 2008, Buffett was one of the few who could unlock the credit markets. In the past, crises had affected just a few companies, but in 2008, good companies were unable to find credit because the system broke down.
Buffett, as always, had billions of dollars of cash available for the right price. Goldman Sachs received a $5 billion investment for preferred stock issued to Berkshire Hathaway and warrants allowing Buffett to buy $5 billion worth of stock for $115 a share five years later.
It has now been five years since the financial crisis and Goldman Sachs is trading above $150 a share. Buffett has agreed to accept shares worth more than $2 billion to settle the warrants. In 2011, Goldman Sachs redeemed Buffett's preferred stake at a 10 percent premium.
A similar deal with GE also resulted in billions of dollars in profits from a $3 billion investment.
In hindsight, these trades seem like they were guaranteed winners, but in real-time, there were concerns about a market meltdown. There were few buyers at the time. Buffett remained calm, identified companies that could survive the crisis and reasoned that five years would allow time for the system to recover.
Individual investors can learn a great deal from this. When buying, they should not be concerned about what the price will be tomorrow or even what the price will be in one year. If they are successful, they will enjoy large gains in five years or longer. Ignoring the short term can be difficult, but Buffett has proven it can be the key to success.
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