Buffett's $5B investment in Goldman Sachs could pay off

NEW YORK -- The savvy billionaire executed his legendary buy-on-the-cheap strategy to a T.

Buffett bought Goldman stock when fear was high and the price was low — almost 55% below its 52-week high of $250.70. He grabbed a big stake in a firm considered best in its class. He got a 10% dividend to reduce risk. And he didn't have to buy any of the toxic mortgage-related assets, which the federal government is proposing to do in an effort to thaw out frozen credit markets and get financial markets working smoothly again.

While the deal is far from risk-free, the turbulence and fragility of financial markets suggest Buffett got a pretty good deal and stands a good chance of making money.

"It's a very savvy strike by Buffett into a very panic-stricken marketplace," says Jeff Matthews, a hedge fund manager, blogger and author of an upcoming book, Pilgrimage to Warren Buffett's Omaha. "He's not buying any bad debt. He is buying a very secure ownership in Goldman Sachs."

"Buffett is basically betting that the financial system does not collapse," says Michael Holland, a New York-based money manager.

Raising capital was the "right thing" for Goldman to do given an anticipated wave of bank-capital raising, Merrill Lynch analyst Guy Moszkowski wrote in a report. "The high cost is a sign of tough times," he noted. Still, "We see an investment by Buffett as … the ultimate validation of Goldman's pre-eminence and its long-term prospects."

The deal comes amid one of the worst financial crises on Wall Street since the Great Depression. It followed a full-day of contentious debate on Capitol Hill over the fate of the government's $700 billion Wall Street bailout plan. It follows the bankruptcy protection filing of Lehman Bros., the bailout of insurer AIG and the government takeover of the nation's two mortgage giants.