Goldman Sachs Investment Journey

I bought it at US$95.80 on 2 July 2012 and sold it at US$189.80 on 31 Oct 2014. As a result, I made approximately 100.5%

About Goldman Sachs

GS is an American-based investment bank where a lot of business graduates want to work there for high pay checks. It was one of those who are least affected by sub-prime crisis because of early sub-prime instrument assets sale. It is commonly known that GS excels very well in getting high revenues from M&A advisory and IPO. It is the brief summary and in reality, there is much more than that about what GS do globally.

Investing Rationale

I first look GS’s share price in early 2012 and subsequently thought that it is not selling at extremely bargain price. I moved on searching for suitable investment opportunity. Few months later, I noticed an investment thesis put forward by American gentleman, Alex Bossert (younger than me). After reading it, I re-check the GS’s share price. It was selling at 52 week low price in 2012. At that time, all investment banks were unloved if I am not wrong.

Warren Buffett had exclusive deal with GS by buying GS-issued preference shares with 10% dividend yield and option to convert to common shares in 2008. In 2013, Warren Buffett converted them to common stocks – I suppose that it is true as per media news - and held them on behalf of Berkshire Hathaway.

It is highly probable that GS will increase revenue and profit for its given reputation and proven ability. At the same time, I couldn't find any good reasons why GS’s share price was falling.

I was surprised with such low price and never had hesitation to buy it. Basically, it is easiest investment opportunity as in we just get over one-foot bar. It is no doubt that it is selling at large discount on net assets which most assets and liabilities are recorded on mark-to-market basis.

Mark-to-market accounting treatment may have both pros and cons. Regardless of pro or con, it is important to have sufficient margin of safety to protect your valuation error.

It is difficult to ascertain how much risk GS is taking in order to generate such high revenue. Most annual report list out the risk exposures by quantitatively. However, I do think risk magnitude for financial firms is somehow larger - cannot be easily quantified in terms of future events- than non-financial firms. But, in 2012 onward, all banks have to ensure that its balance sheets pass the stress test conducted by Federal Reserve as well as meet the requirement of (new) Basel 3, which will be fully enforced in few years time. For these reason, it is also probable that GS is less risky company in 2012 than that from 2007 or earlier by the way of adjusting the heavily discounted assets portion and least discounted asset portion by virtue of Basel 3 and stress test.

What Has Happened During Holding Period

After buying GS shares, I recall that GS has some sort of investment with BRT Realty Trust, which I sold BRT shares last year, on the construction of Teacher Village. Not only this, GS also invest in New York City prison program

GS was building in-house bank to lend money to wealthy customers. It also lends money to corporations who make investment and do business with GS.

As expected, GS is no. 1 or no. 2 in M&A and IPO deals on the ‘league table’. GS was able to increase its dividend per share three times in between 2012 and 2014 as Federal Reserve allowed it.

GS’s fixed income division was experiencing losses in early 2014 due to unpredictable decision-making choice of Federal Reserve concerning quantitative easing (QE). Not only GS, other banks’ fixed income divisions were experiencing too.

In May 2014, GS was selling its operating rights as designed market maker in NYSE. It is the part of strategy of offloading businesses with declining yield and focusing more on profitable ventures.

I am surprised that GS is willing to invest in IEX, considering GS' poor ethical treatment to its sub-prime related customers.

They may be insignificant events. However, they tell us what direction GS is going towards - different people have different way to interpret. Most likely, GS’ share price rise may be attributable to its ability to beat Wall Street analysts’ quarterly estimate most of the time and its ability to raise dividend.

Rational for Selling GS

GS is steering towards the right course of generating profits visibly for the next few years. However, I feel I should take earliest opportunity to reduce the number of stock positions in the portfolio as well as exposure to banking industry.

Disclosure: I am long on Berkshire Hathaway Class B stocks.