Unless You Own Berkshire Hathaway, You Are not Getting Warren Buffett's Deal on Goldman Sachs

Warren Buffett is the greatest investor in the world and he has made another great deal for himself and for his shareholders. This time Berkshire has purchased preferred shares in Goldman Sachs for $5 billion. The shares pay out a 10% dividend and are convertible to common at 115/share. If converted to common at that price, Berkshire would own 10% of the company.

There are many different ways to price options. Any mothod that you use would impute that Goldman should be trading below $115, below the strike price. But, Berkshire isn't just purchasing an option, it is purchasing convertible debt with an option feature. If you look at the debt pricing, it also imputes a value of Goldman that would clearly be below $115, but that arguably values the company at virtually nothing if it is paying a 10% cost of capital.

Berkshire bought a similar instrument in Level 3 in 2001. If you sold the stock that morning on the news, you would have gotten out at a price that it hasn't seen in the seven years since.

Goldman is a sell, not a buy on this. Berkshire Hathaway is a buy. It always is.