Buffett Lost $10 Billion While This Little-Known Billionaire Tripled His Net Worth

Amy Calistri's picture

Friday, October 2, 2009 - 11:46am

by Amy Calistri

Twenty million dollars’ worth of poker chips sat on the table. 

I watched as bets went into the pot -- $100,000 at a time. A single hand could cost upward of a $1 million.  
 
The game was winner-take-all, and it had already gone on for days. 
 
Ted Forrest sat at one end of the table. Forrest is a world renowned professional poker player. A month after this match, he would go on to win the NBC Heads-Up Championship (and $500,000). 
 
At the other end of the table sat Andy Beal, a banker from Dallas, Texas. 
 
I was only one of two people allowed to observe this now-epic heads-up match at the Wynn casino in 2006. It was only the second time I’d met Beal, but I could tell he wasn't intimidated by an uphill battle.
 
That's why I wasn't at all surprised by when I read this in a recent Forbes article:  
 
"The biggest gainer [in the Forbes ranking of the richest people in the United States] is banker Andrew Beal, who tripled his net worth to $4.5 billion buying up cheap loans and assets as the markets crumbled last fall.”
 
"Almost all of America's richest citizens are poorer this year," read the article headline announcing the latest Forbes 400 list. As stock markets the world over tumbled, the devastation was felt not only by the country’s richest but by almost everyone.

Everyone, that is, except Andy Beal.

I’d read about Beal before I met him. I’d heard about his prowess at buying undervalued real estate at auction while he was still in his teens. I’d learned how he grew his fledgling Beal Bank by buying up cheap loans during the S&L crisis. And at our first meeting, a tale I will save for another day, I would learn how Beal never overvalued anything, even when it meant ignoring prevailing wisdom.      
 
Beal was the acknowledged underdog in that poker game. But I took his picture, above, just after Beal won his days-long battle against one of the best heads-up poker players in the world. 
 
What Buffett Did Wrong

The Forbes article revealed that one of America's most popular investors, Warren Buffett, saw his fortune dwindle by $10 billion in the last year.  Buffett is known for his “value“ approach to investing, but the famed “Oracle of Omaha” confessed that he overpaid for at least one large position last year that came back to haunt him.
 
In the spring and summer of 2008, Buffett bought roughly 66.5 million shares of ConocoPhillips (NYSE: COP), just as the oil bubble burst was about to burst. It was a rare misstep. But Buffett wasn't the only one betting on a continued rally in oil. As the price of oil soared above $140 a barrel, headlines predicted it could go as high as $250.
 
What Beal Did Right
What was Beal doing in the summer of 2008? He was waiting, and had been for more than a year. He’d sold off a lot of his loan portfolio at market highs and had even borrowed money just so he'd be flush with cash when the hot financial markets cooled.

I'm not sure even he suspected how cold they would eventually get. 
 
Waiting wasn't easy. Mortgage sellers like Countrywide Financial (which later nearly went bankrupt before it was acquired by Bank of America in June 2008) thought Beal was insane for not buying its loans. Bank regulators and credit-rating agencies questioned why Beal’s loan portfolio was so small when other banks were loading up on mortgage-backed securities. The ratings agencies even threatened to lower his credit rating. But still, he waited. 
 
When the financial markets collapsed, Beal Bank started cherry-picking toxic assets at rock-bottom prices. And, as Forbes notes, Beal tripled his net worth in less than a year.
   
There's an adage in the investment world: Buy low and sell high. Most people roll their eyes when they hear it because they know it sounds easy but rarely is. 
 
It's especially hard when investors are exposed to frenzied trends, reading headlines like last year's "Oil Price May Go Up to $250, Warn Experts" or this year's "Sugar is the Next Oil." I'm not saying it always pays to be contrarian. But investments fueled by speculation and momentum can fall back to earth with a vengeance. On the flip side, once investments fall to fire-sale prices, further downside risk is more likely to be offset by upside potential.    

Andy Beal did not win his match against Ted Forrest in a single hand. In fact, there were many times in the course of the match when Ted Forrest had the advantage and the momentum. But Andy Beal was patient and vigilant.

Unbridled speculation in the market fooled even a savvy investor like Warren Buffett. But Andy Beal proved once again, that even in one of the toughest investing climates of our lifetime, a patient and vigilant investor can win even the toughest uphill battles.

Amy Calistri does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.