Making $15 A Second

Amazon is raising its minimum wage for U.S. employees to $15 an hour. This has lead to cheers from employees and critics a like. I think most people would be happy to have a job paying us $15 an hour. But not Warren Buffett. He’s hurdle rate is much higher. When he looks for returns, he wants something closer to $15 a second.

To understand how Warren Buffett made $15 a second, we need to delve back in time to 2008.

The year 2008 was not a good one for most working in the financial sector. We saw losses, bank runs, liquidity shortages and thousands off layoffs. If there was ever a time for the most optimistic of persons to become a pessimist, 2008 was it. Such was the freight, it was hard to imagine any light at the end of the tunnel. Those working in the banking industry will tell you jut how close we came to a collapse of the global financial system.

September 2008 was arguably the height of the global financial crises. Lehamn Brothers fell during the month and AIG was bailed out. This was sheer panic time. In the midst of all the horror on Wall Street, there was only one man who remained calm. Enter Warren Buffet.

On September 24, 2008, Buffett made one of the best deals that happened during the financial crises. At a time when banks faced a huge liquidity squeeze, there was only two options in order for a large bank to get a huge capital infusement, the US government and Berkshire Hathaway. Goldman opted for Warren Buffett’s Berkshire.

Having Warren Buffet’s Berkshire Hathaway as a cornerstone investor during a time of crises gave Goldman Sachs the Good Housekeeping Seal of Approval it needed to move from potential insolvency to a position of relative strength. As a result, Goldman emerged from the financial crisis far better than most of its investment banking brethren. 

But that seal of approval came at a cost. You see, not only did Berkshire buy $5 billion worth of shares and special contracts (called warrants), Goldman also gave Berkshire an option to buy more shares at a set price. And Buffet took full advantage.

The shares Berkshire bought came with an annual 10% dividend – Goldman had to pay Berkshire $500 million a year in dividends. The annual dividend to Berkshire translated into $1.4 million per day, $57,000 per hour, $951.29 per minute and $15.85 per second.

Now that is some serious cash.

Berkshire eventually ended up selling their shares to Goldman in 2011. There has been reports that Buffett made $1.75 billion or so from the Goldman shares he bought. In addition to this, the profits on his warrants are about $1.35 billion. All in all, Buffet made a profit of $3.1 billion from the Goldman deal – a return of 63%. No wonder Buffett is classed as the best investor of all time.

As with any Buffett story, there are always some key points to take away. From his Goldman investment, we learn that Buffett is a master of buying stocks while others are panicking. He bought Goldman at the depth of the financial crises when most people were looking to pull money out of banks. Buffet may have been ridiculed at the time for pouring money into a falling sector. But he had conviction in what he was doing. And this is another lesson to be taken away. Great investors have confidence in their own convictions and stick with them, even when facing criticism.