It’s no surprise Warren Buffet’s long hated gold.
And his reasoning for doing so – in my opinion – is ridiculous.
He wrote in his recent annual letter to Berkshire Hathaway shareholders of the importance of holding stocks over gold.
In his exact words: “the magical metal [gold] was no match for the American mettle [U.S. stocks].”
His basic argument was that if you invested both $10,000 in stocks (the S&P 500) and gold in 1942 – you’d have made $51 million in 2018 via stocks and only $400,000 via gold.
“In other words, for every dollar you could have made in American business, you’d have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines,” he said.
Honestly – I found his argument irritating. And for two main reasons:
First – Gold isn’t about beating the market – it’s about the preservation of wealth.
Put otherwise – it’s insurance on your capital. And Buffet should know this difference better than anyone.
His mentor and the father of value investing – Benjamin Graham – had written before about the difference between investment and speculation.
Putting it simply – investing is protecting what you’ve already made (your purchasing power – what you can buy with your money). And speculation is betting on the future (buying ABC stock because you think it will go up for XYZ reason).
Many think you get rich and just park your cash in the bank and that it’s safe until you want to spend it.
But what about inflation? What about a bank run?
These are real problems that even developed markets still deal with.
For instance – just slightly over ten years ago in the 2008 Crisis, banks in the U.S. (such as Bank of America and Citi Bank) were about to fail. And that would’ve meant you couldn’t withdraw your money from them since the banks wouldn’t have money to give. (This terrifying bank failure situation is what made the 1930’s depression the ‘Great’ depression).
And don’t believe inflation’s still a thing?
Well – since 2016 (after Brexit) – the British Pound’s lost over 24% of its value against the U.S. dollar.
For example: that means British consumers must pay much more to buy the same imports from the U.S. – and British companies that borrowed U.S. debt must pay 24% more to convert their pounds into dollars.
That’s a huge drop in ‘purchasing power’ – aka what you can buy in ‘real’ terms (after deducting inflation) with your money.
But if people in Britain held gold in their portfolio – they were protected (hedged) from the pound’s huge drop. . .
Just look at the price of gold costs in British Pounds. After 2016 it soared. (Remember – when gold increases in costs, it means that it takes less paper money to buy that same ounce).
So again – Buffet doesn’t seem to understand (or cares about) the real reason for owning gold.
Gold is an investment – not a speculation (save that for the gold mining stocks).
It’s a liquid (easily sell-able) way for savers to protect their purchasing power from irresponsible governments or hedge funds that pull money in and out of foreign exchange markets.
Now – my second reason against Buffet’s anti-gold rational:
How do we know if Buffet’s really that good of an investor?
Now before you crucify me – just hear me out.
Luck (aka being in the right place at the right time) is a huge factor in markets. And many ‘experts’ downplay it.
But we can do the simple arithmetic in our heads. . .
Assume there’s only 10,000 seasoned money managers (investors) and that each year, half of them beat the market (made money), and the other half didn’t (lost money). Further, each year the losers are taken out of the rankings.
After five years – there would only remain 312 investors from the original 10,000 that have beaten the market five years in a row.
That’s a steep drop.
And after 10 years? There are only nine left from the original 10,000 that beat the market each year – just from pure blind luck.
So here’s the question: what if Buffet was one of those lucky nine that helped get him to where he is?
No doubt Buffet is brilliant. But I can’t help but think if many would still think his wisdom was this great if he was one of those unlucky bunch.
His trading mantra has been to simply be long American equities. And to “buy when there’s blood in the streets”. He doesn’t really trade. And he has always had more than enough money (and time) to simply ‘buy and hold’ until markets rise.
When you’re super rich and can suffer through market crashes – and even have enough money left over to buy distressed assets – this is a great way to make money.
And Buffet has taken great advantage of these market crashes (which are really just transfers of wealth from one hand to another).
He did it in the 1980’s, the early 1990’s, and during 2008.
And with the Federal Reserve keeping rates lower and lower (since the mid-1980’s), many can just sit back and let the inflation push asset prices up. Just look at major index funds that have risen year over year as long as the Fed’s there to bailout any major crashes.
Don’t forget that equities do well against inflation also – but only if you don’t have to sell during a crash.
Imagine those soon to retire investors that saw their portfolios drop 50% in 2008. They must somehow survive without selling their assets at low prices. And then hold another roughly 10 years until regaining 100% (hopefully) only just to get back to break even. (A 50% loss requires a 100% gain just to get back to the starting point – Mark Spitznagel, one of my favorite traders, calls this the Volatility Tax).
So ask yourself: what if Buffet’s just a lucky investor that’s greatly benefited from Fed bailouts and inflation?
I think he’s someone that most casual investors can’t relate with because he’s hedged either way from market crashes (he has ammo to buy low and wait for a bailout and recovery) and inflation (he owns real assets like train tracks and buildings; not just paper money).
A more practical strategy is to utilize both gold and stocks – invest and speculate (I prefer to ‘tail-hedge’, but more on that later).
Don’t forget that many companies have since gone bust since 1942. But gold has held it’s utility for thousands of years.
Just some food for thought. . .
