Monday, May 7, 2012

Warren Buffett vs Gold and Silver…and the Winner is…

Recently, the folks at Berkshire Hathaway have talked down precious metals. Warren Buffet and Charles Munger (two titans of the stock investing world) had made some unkind remarks about precious metals in general and gold in particular.

I have tremendous respect for them (who doesn’t?) and I think that if the topic is “long-term stock investing” then few (if any) could match the performance they have racked up in recent decades. I wish them continued health and prosperity! But I write this essay for a very specific issue and that is their attitude towards precious metals.

I believe that it is a less than stellar record when you scrutinize it. If you were an investor with them you would obviously be doing it by investing in Berkshire Hathaway, right? Therefore, we could easily construct a scenario where we could have pitted their stock against those barbaric and unproductive metals, gold and silver.

Let’s imagine that you broke up your portfolio into 4 parts and invested equally on the first trading day of 2000 into the following entities;

1) Berkshire Hathaway class A stock
2) Berkshire Hathaway class B stock
3) Gold
4) Silver

How would that type of portfolio performed since the beginning of the millennium?

1. Berkshire Hathaway class A stock started at $54,800.00/share and closed on April 30, 2012 at $120,800.00 for a total percentage gain of 120.44%. Nice!!

2. Berkshire Hathaway class B stock started at $35.40/share and closed on April 30, 2012 at $80.45 for a total percentage gain of 127.90%. Also Nice!! (please note that the stock price quoted here is adjusted for stock splits)

3. Gold started January 2000 at $282.05 (Kitco.com closing price 1/4/2000) and closed on April 30, 2012 at $1,651.25 for a total percentage gain of 485%. Ultra nice!!

4. Silver started January 2000 at $5.30 (Kitco.com closing price 1/4/2000) and closed on April 30, 2012 at $31.20 for a total percentage gain of 488%. Ultra nice again!!

Given the above, one can see easily that the two most popular precious metals outpaced the stalwart Berkshire Hathaway by nearly 4-to-1 over nearly 11 ½ years! Bashing precious metals for being unproductive is certainly uncalled for…especially given that amazing comparison.

If you noticed, I didn’t choose some arbitrary period like a single year or other short-term measurement. As most of you know, Mr. Buffet (to his credit) is a true long-term investor and patience has been his “secret” to success. He typically doesn’t trade stocks or decides to jump in one day and jump out the next. “Buy and hold” for him is not some flashy saying…it is part of a long-term discipline approach to wealth-building.

Therefore, I think the comparison in this essay is valid.

Look…I like stocks and I like precious metals and my Dummies guides on these two topics attest to that. When times are good (I look forward to that), stocks will most likely lead the pack. But when times are as uncertain and as dangerous as they have been (and still are!), you need diversification above and beyond mere paper assets.

There will be plenty of good stocks that should do well during the next few years but I am definitely very bearish on the overall stock market because the massive risks from many venues are still there and in some ways growing more dangerous.

Yes…there will come a day when I am not bullish on gold and silver. However, given that politicians, government bureaucrats and central bankers have not stopped their massive financial and economic mismanagement, that day is still very far away.

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1 comment:

  1. I have several problems with your article.

    First, going back to 2000 is not really a good time frame to compare stocks and gold, because 1) data exists to compare the two asset classes for much longer back in time, and 2) stocks were valued at all time high levels in 2000.

    Data exists for spot gold prices back to 1979 -- since then, gold is has "returned" about 2% per year, while the S&P 500 has returned about 10% per year.

    Second, as you note, there are lots of risks evident in the macroeconomic landscape today. However, that is ALWAYS the case - there are always things that investors could point to and say "this risk scares me away from stocks."

    If you really understand Buffett's approach, you get it that Buffett acknowledges that there are always risks - but the KEY is to determine how well the investor is compensated for accepting the big picture risks based on the valuation you have to pay to own a stream of cash flow into the future.

    At present, valuations are low relative to 1) historic averages, and 2) relative to interest rates --- investors at present can own the S&P 500 at an earning yield of roughly 8%, versus 2% for the 10 year treasury (a very wide spread relative to history), and zero for gold, where the "investor" is dependent on there being someone down the road willing to pay a higher price for his gold in order to earn a return for holding the commodity.

    Third, I don't think Buffett is "bashing" gold so much as assessing the likely expected returns, prospectively, for the major asset classes. Gold has done great since 2000 --- but that says nothing about its likely performance going forward, and, if one believes in the power of reversion to the mean, it may portend an extended period of low returns for gold compared to the past 12 years, because again, gold has no intrinsic value; its "value" is what others may perceive it to be. Long term, it might be realistic to expect gold to return something around inflation, and for its return to be inversely corellated with "global angst" - gold doing better when people are fearful (especially of inflation) and doing worse when investors feel better about the general state of global economic conditions.

    Buffett is comparing the implied value of all the gold in the world, and noting that for roughly the same value, an investor could own most or all of the real estate in the U.S., etc etc.

    I would surmise that if gold were $20 per ounce, and the S&P 500 traded at 30x earnings, Buffett would view gold as a more attractive investment, with one critical caveat: given his long term horizon, much of the "value" he sees in stocks (and wholly owned companies inside of BRK) is the present value of the likely future cash flows from those companies. While earnings do vary year to year, most of the companies BRK owns have fairly stable cash flows, which allows Buffett to come to a ballpark estimate of their net present value, and compare that to current prices in the marketplace. A similar analysis is impossible for gold because gold does not produce cash.

    So --- you can prefer gold at $1,600 an oz, up from $200 per oz 12 years ago . . . . .but I my take is that Buffett views the odds of earning a decent return on gold from current levels over the next few years are low, because gold has done so well, and stocks are valued so cheaply on an absolute basis.

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