WTF, Warren Buffett?


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:

the Eight Central Bank Balance Sheets

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:

Bundesbank(Germany's Central Bank) Balance Sheet

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

This article originally appeared in Sovereign Man: Notes from the Field.

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2012-02-17 – Nick Hubble

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How Warren Buffett Looks at Stocks vs. Gold Investing
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2012-02-14 – Dan Denning

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5 Comments on "WTF, Warren Buffett?"

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4 years 8 months ago

It seems Mr. Buffett has sold his soul to the devil, in making such pronouncements. Time to retire gracefully, i think.

Jeremy Britton DipFA SA(Fin) AAHA HH Dip(PH)
Jeremy Britton DipFA SA(Fin) AAHA HH Dip(PH)
4 years 8 months ago
Warren Buffett is a terrific investor with an impressive track record; but, he is not God Almighty and he is not infallible. Taking careful consideration of the market as a whole, looking over 4000 years of gold prices vs. silver prices, the inherent deflation of *any* currency, not just the US$, I am tempted to agree with Mister Buffett. Buffett is a loyal US investor and for almost five decades from 1954 he invested solely is US stocks… That was, until 2000, when he broke his own unwritten rule and purchased AU$ and Aussie mining stocks such as BHP. This… Read more »
4 years 8 months ago

I remember Warren Buffet about 5 years ago bought BAC stock at a price much, much, much higher than what it is now. I have stopped paying attention to Warren Buffet since and have made a lot of money by investing in (((GOLD))).

Alexander Malejew
Alexander Malejew
4 years 8 months ago

@Jeremy_Britton. Look at the 5 year performance of Berkshire Hathaway stock. In 5 years it has managed to squeeze out not even a 2% annual return. Now look at the performance of Gold. What a return!
Pretty good huh?

4 years 7 months ago
I don’t know why there are Warren Buffett bashers out there. He has given so much timeless advice on investing. Just because you don’t agree with him on gold, and he made a couple of mistakes over his 50+ year career, thats no need to say he is not worth listening to. You may have a different investment style to him but for over 10 years he was making 32% returns per year. Even short term investors would be proud of that. In 10 years time you will see he may well be right about gold. Gold has only done… Read more »
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