Buffett's cash pile is looking pretty good right now
Stock Market Analysis

Was Warren Buffett Right To Dump Goldman Sachs Shares?

When Warren Buffet decides to get out of a major investment position, the rest of the financial world usually sits up and takes notice. 

After investing $5 billion in Goldman Sachs (NYSE: GS) back in 2008 as the bank was struggling to stay afloat amid the global economic crisis, Warren Buffett has decided to now dump most of Berkshire Hathaway’s (NYSE: BRK.A)(NYSE: BRK.B) stake in the investment bank. 

Reasons for this move

This investment was a vital vote of confidence for the financial sector not long after Lehman Brothers went bankrupt. A redrawing of the deal came in 2013, with Berkshire converting warrants into about 13 million shares. 

It was in Q4 2019 that Berkshire sold 34% of its stake in Goldman, followed by 84% of its stake in Q1 2020. While no clear reason for this sale was provided by Buffett, the changing economic climate does appear to be a catalyst. Berkshire has been stocking up on cash recently (currently holding a record $137 billion in cash), with the company seeing the financial markets as being overvalued.

Buffet explained that Berkshire’s recent liquidation of its significant airline holdings was due to unacceptable levels of risk, so there could be a similar reason for getting rid of its Goldman position. Banking will likely suffer considerable strain as the coronavirus pandemic keeps businesses closed, while concerns remain concerning Goldman’s leadership.

Buffet has long placed an emphasis on the management of a company when considering investments. CEO David Solomon bucked the non-extravagant image the bank has developed in recent years by recently purchasing two Gulfstream jets for the company. 

Solomon also took a 20% pay raise in 2019, bringing his salary up to $27.5 million. This is the highest salary for any U.S. bank CEO and comes despite Goldman’s stock price struggling to match its rivals for the 18-month period that Solomon has been in place. 

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Goldman Sachs: Bull vs Bear

One of the saving graces for Goldman amid the current crisis is that its small business and consumer loan exposure is pretty low compared to other banks in the country. Rivals, such as Bank of America (NYSE: BAC) have been setting aside significant sums ($5 billion for Q1 by Bank of America) to cover expected loan losses in these areas. 

The company has also performed well historically compared to other leading banks in more volatile times. Two main areas that will likely see a large uptick in trading revenue are the M&A advisory and underwriting businesses. The investment bank is also looking to make more moves in consumer banking. There is an easy entry investment platform in the works, in addition to an online checking account offering. 

Goldman does heavily rely on its global markets and investment banking businesses, representing about 84% of total revenue in Q1. Naturally, the fortunes of these businesses will have a significant link to the performance of the financial markets. This side of the business will be of concern for investors as a lot of economic uncertainty is ahead in the coming years due to the fallout of the pandemic. 

Is it best to avoid banking stocks for now?

With 11 main sectors making up the S&P 500 (NYSEARCA: VOO), financial services has been the sector that has performed the second-worst so far in 2020. It has seen a 30% decline, followed by the energy sectors 38% drop.

With the U.S. economy struggling due to ongoing shutdown and mass unemployment, this is only going to pose problems for banks. The loan losses will take a while to impact the financial results of the banks. It might not be until 2021 that a material spike in loan losses is noticed. 

Banks now have a lot less leverage than back in 2009, so the same sort of banking crisis is not likely. With a lot of bank stocks now trading at a discount, there may be opportunities to spot some value. However, with a second wave of the virus potentially on its way, it seems like more of a wait and see approach is best for banking stocks.


MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in StoneCo. Read our full disclosure policy here.

Andrew O'Malley
Andrew O'Malley
Andrew is a contributing writer to MyWallSt. He is a full-time finance writer, having spent time working in the industry. He studied Economics and Finance and has been fascinated with the financial markets since his teens. The first stock that Andrew bought was Apple, reflecting his love for its products.