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WTF, Warren Buffett?

February 13, 2012
London, England

[Editor’s note: Professional money manager Tim Price is filling in for Simon today from London. His thoughts below on gold, bonds, and the false pretext of investing in equities is delightfully insightful.]

For value investors of a certain age (e.g. mine), discovering that Warren Buffett could be wrong is like suddenly not believing in Father Christmas. This twinkly-eyed, raspy-voiced, avuncular old gentleman almost embodies Clint Eastwood crossed with a Care Bear. And nobody can hold a candle to his long-term investment record.

And yet, the rot set in (at least as far as this writer is concerned) when Buffett went from investing in private non-financial businesses to siding with the establishment, using his institutional heft to win sweetheart deals in dubious banking institutions way beyond the reach of regular Joes.

In other words, somewhere along the line he went from representing the 99% to representing the 1%. And at the first sign of trouble, he simply wraps himself up in the American flag.

Buffett’s latest advertorial (for himself and for Wall Street), “Why stocks beat gold and bonds,” adapted from an upcoming version of one of his legendary shareholder letters and published in Fortune, may be the most irritating thing he’s ever written.

As an investor, he rightly draws attention to the critical requirement to maintain one’s purchasing power in the face of rampant state inflationism. He accurately highlights the staggering reduction of real value in the US dollar since 1965 (some 86%). He fairly declares a dislike for currency-based investments in a world of rapidly inflating, unbacked fiat.

And he then goes on to rubbish gold using the tired and specious argument that purchasers are simply displaying “greater fool” theory, eagerly awaiting new rises in price that will suck in new purchasers ad infinitum. It looks suspiciously as if Warren Buffett, for all his undoubted investment success, has never actually studied any monetary history.

We know that he has speculated in silver in the past, and that the experiment did not end well. He concedes that gold has industrial and decorative utility, but also states that “if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

Erm, that’s kind of the point.

A straw man argument gets wheeled out that a pile of inert gold cannot hope to compete in terms of productive utility with a pile of farmland and Exxon Mobil stock of the same nominal value.

To which one is surely entitled to respond, “WTF?”

It would be surprising and not a little alarming if anybody who has ever purchased gold did so with the expectation of eating it, or using it as fuel.

Buffett would be on stabler ground if he made an intellectually valid comparison between gold as a store of value and, say, a big pile of T-Bills of the same nominal value. Or of the same US dollars he has already identified as a more or less guaranteed loser over anything other than the very, very short term.

The reason why Buffett’s views of gold should be ignored can be seen in the following charts, all courtesy of James Bianco at Bianco Research.

The first shows the extent to which the eight largest central banks (China, the ECB, the US, Japan, Bank of England, Banque de France, Swiss National Bank, and Germany’s Bundesbank) have allowed their balance sheets to explode, in a desperate attempt to compensate for banking and private sector deleveraging since the debt crisis began:

chart 1.png
As Bianco points out,

“If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE.”

What’s particularly shocking about the data is that while every major central bank is busily printing money like it’s going out of fashion (which it is), one of the biggest culprits is the one most widely associated with sound monetary policy, namely the Bundesbank, which has been one of the biggest inflationists of all:

chart 2.png

The Big 8 central banks now account for the equivalent of one third of world stock market capitalisation. Investors (like Buffett) buying stocks now may well be doing so because they anticipate more QE- which they are more or less certain to get, given that most of the West is turning into Japan.

Warren Buffett is not the only institutional investor to be offering unsolicited investment advice. Blackrock chairman and CEO Larry Fink, recently interviewed on Bloomberg television, gave a guarded opinion on asset allocation:

“Be 100% in equities.”

Interesting. I wonder if Blackrock, as a $3.5 trillion asset manager, has anything we could buy?

Fink’s and Buffett’s preference for equity investment may have nothing to do with expectations regarding things like economic growth or profits, just money printing. This is not founded on sound economic reasoning, rather simply shifting capital into an ever-rising bath.

What happens when central banks stop filling the bath? Or worse, take the plug out?  Or worse yet, find that they are no longer in control of the water?

The investment world does not come down to an all-or-nothing decision between debt (mostly rubbish, now, admittedly) and equity. While the bigger picture is fraught with monetary mismanagement in response to a grave crisis, there are plenty of other investment choices out there, and a growing argument underpinning the ownership of real assets.

Tim Price

Director of Investment
PFP Wealth Management

Tim Price is Director of Investment at PFP Wealth Management in the UK. PFP is an independent wealth management partnership with over 20 years’ experience of institutional and private client investment management. Tim is a specialist in low risk, multi-asset, absolute return investing and has enjoyed success in the UK Private Asset Managers Awards programme, having been shortlisted for five successive years, and was a winner in 2005 in the category of Defensive Investment Performance. He was also shortlisted in the 2007 Spear’s Wealth Management Awards in the category of Asset Manager of the Year. He is a regular contributor to Money Week magazine in the UK and to other financial media.

PFP takes a more nuanced perspective, and in addition to holding high quality non-Anglo Saxon sovereign and investment grade debt (yielding more than 6% to boot), PFP holds selective high quality equity investments, but also completely uncorrelated trading vehicles, and precious metals.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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Comments on this entry are closed.

  • Elai

    Warren Buffet has always been against gold for decades, he has put similar arguments frequently.   Is there anything new this time?  Why are you surprised?

  • Bill H.

    The investment community has long held Warren Buffett up as a god for his success, and now we see he is a crony capitalist. Look a little deeper and you find out his whole strategy is and has been to invest in highly regulated industries that destroy competition and profitable companies, and then come in and buy them up for pennies on the dollar. It may be a ‘necessary evil’ part of capitalism, but this guy is like George Soros, he likes competition killing regulations that give him an unfair advantage and a corrupt tax code full of loopholes for people like him with an army of lawyers and accountants to use, again giving him an unfair advantage most private investors do not and will not ever have. This is the ‘Oracle of Omaha’? The investor that so many financial advisors have held up as their god for so long? The one who is campaigning for Obama and the Socialist agenda? I despise him.

  • http://twitter.com/Cowchin Michael Hunt

    Elai, when you go prospecting for gold, look for the shiny yellow stuff. Don’t get discouraged or focus on the rocks or dirt or other stuff that the gold is hidden in. 

  • Mad Dog

    In 2007 I saw the video I.O.U.S.A that was produced by Addison Wiggons, David Walker and the Peter G. Peterson Foundation.  A wonderful documentary based on a book with the same name and author.  FYI, the documentary included an interview with Ron Paul where he stated his economic theories – the same theories held by the IOUSA group – the same theories that defined Ron Paul’s presidential platform in 2006, 7 & 8  –  the same theories that predicted what DID actually happen to our economy in 2008, 9 & 10.  FYI, a copy of the IOUSA book was sent to every one of the 535 legislators and another 50 to the WH administration.  Wiggon’s still covets the thank you letter he got from Senator Obama.  But with the exception of Ron Paul, NOT ONE candidate in the 2008 elections made the US Economy the main plank in their platform.

    So what?  Well, Warren Buffet was also on that panel of economic and financial experts in the IOUSA documentary.  And in it – he repeatedly showed his true colors.  No doubt he is a shrewd investor, he is also a self-serving liar;  and he will continue to get rich as “Rome continues to burn”.  And if at all possible, he will buy up all water rights before that happens. 

    And if that wasn’t enough to clinch my opinion of Buffet – he immediately got on-board with every single aspect of Obama-nomics, every bailout and artificial stimulus.  Three years later – we know how that turned out.

    Now he’s claiming that he’s not paying enough income tax.  And yet he pays tax lawyers and accountants millions to same himself billions.  Plus he has several law suits pending with the IRS for tax evasion.  How can ANYBODY take this guy seriously anymore?

  • Willis

    Wow – a near 200% growth of 8 Central Banks balance sheet over 5 years. And a 600% on German Central Bank over 14 years. Is this increase done with currency printed out of thin air? And are the assets these banks hold basically junk?

  • http://jackfeldman.myopenid.com/ Jack Feldman

    Those who have invested in gold over the last decade or so have done wisely, and have profited. More power to them. 

    When the applecart finally tips over, the world’s finance ministers and central bankers will get together to sign off on improvements to the world’s financial system to keep disaster at bay for the next 50 years or so. I’m pretty sure that plan will include confiscation of privately held gold, and the criminalization of civilian gold transactions.

    If I’m right, then the trick is to sell or barter your gold for something better before this happens. A question of market timing.

  • Goldmeister

    Buffett is a new world order insider. His daddy was a 4 term congressman(so much for being “self-made”), and he is personal friends with Jacob Rothschild…you don’t get any more “insider” than that -not to mention any more corrupt. He OWNS the media that fawns over him. In this day and age, only suckers praise him as being a financial genius. He’s a crook, plain and simple.

  • diversion

    Have you thought he did that because he knows the system will collapse and he help prop it up that much longer to profit from it.

  • http://www.mikekey.com/ Mike Key

    I too was pretty disappointed and noticed the shift in Buffett right around 2008 election cycle. He’s now become a straight up talking point for the establishment wallstreet types.

  • Theexpatriatelife

    I think that much of what Warren Buffet and Charlie Munger say publically and do in managing BRK is lost on many of you and this blog is a perfect example

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