Wednesday, 19 August 2020

Warren Buffett Adapts to the New Normal and Joins the Gold Rush

Warren Buffett's Berkshire Hathaway (BH) joins the gold rush by buying into one of the largest gold mining companies, Barrick Gold Corp, spending USD563 million.

 

Ok… all fairness to Oracle of Omaha that BH is buying into a gold mining company and not really the actual gold itself. That said, what is the good of buying the shares of a gold mining company when you think that gold price will fall?

 

Anyway, it is not the first time WB contradicts himself. He used to shun away from Tech stocks, but today, Apple is the largest holding of BH. Airline stocks weren’t his favourite in the past, but he bought it, and then sold it during the pandemic this year. He also dump his favourite bank stocks recently.

 

Yes, Buffett contradicts, but I think he is wise to accept that he make mistakes, and adapt to the new normal.

 

BUFFETT DENOUNCING GOLD IN THE PAST

 

Buffett use to denounce gold as a "cube" that doesn't do anything but sit there and look at you. In his 2011 shareholder letter, he wrote as below,  

 

“Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

 

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

 

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

 

In fact up to recent times before Covid, Buffett is still a non-believer of Gold.

 

RAY DALIO SAID BUFFET IS MAKING A MISTAKE FOR NOT OWNING GOLD

 

On the contrary, Ray Dalio said in 2012 as follows:

 

"I think gold should be a portion of everyone's portfolio to some degree because it diversifies the portfolio. It is the alternative money,"

 

When asked of Dalio if Buffett is wrong about not owning gold back then, he said,

 

"I think he's making a big mistake."

 

Nonetheless, Dalio admits that in the long term, gold is not the best investment because it's an alternative to cash, although he feels that everyone should own at least a little bit of gold as a useful hedge.

 

NOT CORRECT TO COMPARE GOLD TO STOCKS

 

In fact, I still read lately from local investors/writers who idolised Buffett (blindly) totally denouncing any usefulness of the yellow metal or even silver metal in investing, citing Warren Buffett’s negative quotes on gold many times. Perhaps after the news of Buffett’s joining the gold rush, you will hear no one citing Buffett’s discouraging quotes on gold anymore.  

To be honest, you cannot actually compare “apple to apple” Gold and Stocks or Dow’s return over the years. Both are different asset classes. Furthermore, Dow started more than a century ago, while Gold only de-pegged from the dollars in the 1970 with loose monetary policy at its insanity after the 2009 GFC.

 

CONCLUSION

 

To me, Ray Dalio is the investor can see things more clearly. Ray’s ideology and economic principles also make more sense to me. He tends to see the bigger picture better, and also have the insight into the future, learning from the what has happened in the past.

 

He also has a fantastic all rounded life, at least up to now, with success in almost every aspects of life – Health, Family, Wealth, Charity etc. I also like the fact that Dalio is very transparent and extremely humble in interviews. He loves to share the good things in his life to others via the books he wrote, and the Youtube videos he created and posted.   

 

I also do like Warren Buffett a lot. I have read his biography “Snowball” and several other books from him. He is a humble, kind hearted and warm.  

 

But sometimes I think people tends to blindly idolise Buffett because he is the richest and the most successful investor of all time. And people just conveniently use Buffett or Graham investment style to “teach others” being the easiest way to earn money or a name for themselves, so that newbies will see them as expert.

 

We have to remember that Buffett at 90 y.o. has a longer investment journey, when he started investing at the age of 11 y.o., compared to many other investors. I am not discrediting Buffett’s investing expertise. Who am I to do that?  But it is a fact that Buffett was born at the right place at the right time for investment, when USA saw the boom of the century!

 

Frankly, I think WB is wise enough at the age of 90 to adapt to the new normal of the world. Like Buffett, I think we should learn to put away our past stubbornness, accept the new world normal and adapt to it. Above all, keep on learning from mistakes and correct ourselves to improve.

 


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12 comments:

  1. May be Warren Buffet has became a Brand name and no longer strong influencing the company execution. Let the successors decide what they want to take the company forward.

    ReplyDelete
    Replies
    1. Maybe? I am not 100% sure. But guess you also base your opinion on pure conjecture.

      if we look at logic and data, and what I read in Snowball about his character, it does not really support the rationale that WB is just a brand name w/o any decision making anymore.

      WB let the management run the company they owned.. this is clear!

      However I don’t believe investments as big as >$500musd deal and dumping of huge bank stocks, can go without prior knowledge or approval from WB/CM.

      If we think WB or CM no longer make decision, then why did they still chair the Annual Shareholder meeting this year?
      Why did WB still sign off his name in the Annual shareholder and personally go through every single details during Shareholder meeting?

      If you visit BH website, then u can probably know, if WB or the successor make decision on the company?

      https://www.berkshirehathaway.com/letters/letters.html

      I may be wrong, but I prefer logic and data to support my rationale rather than guessing based on pure conjecture!

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  2. Yeah, many are thinking that it wasn't Buffett or Munger who made the gold investment case, but either Weschler or Combs who were the ones who pushed for it.

    The roughly $600M investment is also less than 0.3% of Berkshire's publicly traded equities portfolio, let alone its private portfolio of fully-controlled companies.

    But who knows, maybe next year Buffett will invest in Bitcoin or a crypto exchange. No more rat poison squared haha.

    ReplyDelete
  3. Maybe it’s a birthday present for WB whose birthday is round the corner! :-)

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