buffett

All posts tagged buffett

But despite the panic of 2008, the belief that gold is a foolish “investment” still persists.

I’ve been a strong advocate of gold and silver since 2005. Back then, I sold my condo and used some of the proceeds to buy some gold coins. When I started buying, the price of gold was $495/oz. Today it’s hovering around $1,600/oz.

A lot of people I know complained that gold is relic from olden times. That it has no use in the modern era. Of course, this was before 2008 when it seemed like the entire financial system was about to crumble.

Even Warren Buffett, the Oracle of Omaha, took an opportunity to ridicule gold in his latest shareholder letter.

Buffett wrote,

“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 about $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?”

While I have a lot of respect for Buffett’s views and also own stock in Berkshire Hathaway, I’m going to have to disagree with him on this one.

Gold has always been a store of value. And a valuable hedge against monetary mismanagement – something we (and Europe) are currently experiencing.

David Einhorn, manager of Greenlight Capital, World Poker Champion and author of Fooling Some of the People All of the Time also disagrees. He had an excellent comeback for Buffett’s derision of gold.

In his recent shareholder letter, he referenced Buffett’s analogy, but with an interesting twist.

“The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us,”

As gold dropped 21% from its peak of $1,921 last summer, to $1,544/ounce in May, the media was quick to announce that gold was in a bear market, and that the massive bull-run in gold over.

But gold isn’t an investment. It’s a store of value. Just like cash. And over the centuries it is more likely to retain is purchasing power than any currency or business.

And despite short-term fluctuations in its price, gold will always be worth something. If you don’t believe me, just ask the Greeks!

Gold is also uncorrelated with other asset classes like stocks and bonds. Owning some in a diversified portfolio helps reduce your volatility.

In the past week, the S&P500 was down over 3%, while the gold ETF (GLD) was up 4%.

While I prefer owning gold and silver coins, owing an ETF like GLD is an easy way to get exposure to gold.

How much gold you should own depends on your risk tolerance and other investments. But as a general rule of thumb, gold should be between 2.5% and 15% of your portfolio. Although, Harry Brown’s Permanent Portfolio has done exceedingly well with an allocation as high as 25%.

Disclosure: I’m long BRK-B, GDX, and gold and silver coins

Finally Warren Buffett said what I’ve been harping on about for two years. In his NYT op-ed piece titled “The Greenback Effect” he admited that the government is setting us up for massive inflation and destruction of the US Dollar.

This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion.

During this fiscal year, [our net debt] will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

The US debt is currently financed by foreigners. Foreigners who have excess Dollars because we used to import everything from them. Three years ago during the height of the housing boom, consumers refinanced their homes every year and bought stuff they couldn’t afford, most of it imported from these same foreign countries. Indeed, consumer spending was 75% of our GDP. But with the collapse in housing, what has happend to consumer spending at the retail level?

Monthly US Retail Sales Total YoY

Retail spending has dropped off a cliff. Click on the image to go to retailsails.com which is has a lot of indepth information about the dismal level of retail sales.

And with the decline in spending, imports decline and in turn the ability of foreigners to finance our deficit spending. As they decide they no longer want to buy US treasuries at 3.5% but instead would like to buy stock in undervalued companies, real estate or maybe gold, the Federal Reserve is going to have to work overtime to print all the money it needs to fund the government spending. Buffett projects that the Treasury will need to finance at least $900 billion this way!

With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I forget who said it but inflation is essentially taxation without representation!

Rampant inflation will cause the Dollar to lose its purchasing power against foreign currencies and precious metals like gold and silver which have been stores of value for 5,000 years. Unlike paper money, gold and silver are not subject to the human greed of rulers and maintain their value since their supply cannot be increased exponentially.

Buffett knows that the reputation of the Almighty Dollar is at risk.

Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Will Congress do the right thing or just do what’s easy and keeps them in office? Buffett is betting on the later and has slowly been converting his hoard of of billions of dollars in to foreign currencies like the Brazilian real.

At least I’m sure I did the right now when I started buying gold at $495/ounce!

Here’s a round up of some terrific articles I’ve read in the past week:

  • Why spend $1.7 million on lunch with Warren Buffett when you already know what he’s going to say? Well if you don’t then you better read the link.
  • Is Goldman Sachs the equivalent of a Wall Street Mafia? Read this great piece and you’ll be convinced and maybe flabbergasted as well.
  • Thinking of joining a startup firm? Guy Kawaski offers great career advice that I wish I had received 8 years ago!
  • The specter of the subprime is still lurking! (use firefox plugin “refspoof” to read the WSJ for free)
  • A little bit of personal finance with everyday luxuries you definitely can do without
  • And finally, a link to the Christian Science Monitor’s new economic blog who discusses whether or not you should buy real estate at this time. Of course, with a link back to my site, how could I not include them!

Enjoy!

I guess there isn’t “always a bull market somewhere”!

Jim Cramer just advised people to get out of the stock market saying that stocks might lose 20% this year. Isn’t it a bit too late for that prediction? The Dow Jones Index is already down nearly 25% for the year. Telling people that stocks might lose 20% is like telling people with the flu that they might fall sick!

“I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”

Where was Cramer a few months ago?

But casting aside my skepticism for a second, he actually does have a valid point. He says you should only invest what you won’t need for 5 years. However, this advice is always true, not just for the current scenario. No one really knows what the market will do over 5 years, so investing for at least 5 years helps you ride out any volatility. At least, that’s the theory. If you had invested $1,000 in the Dow Jones Index exactly 5 years ago, you’d be up a whopping $40!

I’ve actually put in a buy order for some shares this evening for tomorrow morning:

ERF – a canadian royalty stock that yields over 15%

BRK.B – a baby Berkshire share. It’s shown great resilience in this market.

EDD – an emerging market government bond fund that yields 20% and is 40% below its Net Asset Value. Even if there are 40% defaults, I should theoretically get my investment back.

CDE – a silver mining stock whose share price has been beaten down next to nothing. I would’ve bought a gold mining stock, but I’m very heavily weighted towards gold and under-weighted with regards to silver.

I had the cash lying in a retirement account and I used 33% of it to make this order. I definitely won’t be accessing this money for a few decades so I think I’ll do well on them in the long run.

Note: These are not recommendations to buy any stocks, even though my passive income is decent, my  portfolio returns for the year are pretty dismal. If you buy these stocks and lose money, I will only laugh at your foolishness!

Today’s guest post comes from Ryan of Semperfinance, a military-community oriented personal finance and stock investment blog.

Education is the key to developing successful investment strategies. Blogs, websites and periodicals are great for staying up to date on the latest and greatest in the financial world, but nothing beats a good old-fashioned book for reinforcing the fundamentals and learning from the masters. Here’s a list of the top 5 investment authors every stock investor should be familiar with.

Benjamin Graham

Considered the father of value investing, he invented the Mr. Market metaphor and advised evaluating stocks as one would evaluate a business. Graham, a Columbia business school professor, published Security Analysis in the midst of the Great Depression. Anyone who can successfully sell books on stock investing during the Great Depression is worth taking a look at. Warren Buffet considers himself a disciple of Graham, even naming one of his sons (Howard Graham Buffett) after him. Every investor should be familiar with his work.

Recommended Books:

Warren Buffett

While not an author of books, Buffett has written many articles and (now famous) letters to shareholders. His writing contains homey Midwestern wisdom, jokes and pearls of investing wisdom. Buffett was greatly influenced by mentor Graham whose work he draws upon, but he has his own insights developed over many years of successful, smart investing.

Recommended Books:

Peter Lynch

Peter Lynch was an investing legend. His should be admired for his work ethic as much as his stock picks. Lynch practiced due diligence in picking stocks 24/7. Even on vacation he would ski a run, call a company to speak to the management then get back on the chairlift and do it over again. Like Buffett and Graham, Lynch advised focusing on company fundamentals and did not try to predict the market.

Recommended Books:

Tom and David Gardner

These two brothers were taught stock market investing by their father and ushered stock investing into the Internet era with their landmark website, fool.com. These guys have created the “Foolish” philosophy of bucking the trends of the “Wise” on Wall Street.

Recommended Books:

Robert Kiyosaki

Some people hate Kiyosaki, but I think he has some very good points to make. Don’t expect a lot of specific investment advice from Kiyosaki, instead he reinforces fundamental financial principles every investor should espouse.

Recommended Books:

If you haven’t read all of these books, you’re missing out on your financial education. Get started today!

The meeting started off with a humorous cartoon video of Charlie Munger running for US president. There was also a short video of Warren Buffett playing a role on tv-soap “Days of our lives” and Susan Lucci actually appeared live at the meeting.

Rather than a boring annual meeting discussing the various aspects of BRK’s business, Warren Buffett instead started fielding questions from the audience, which went on for several hours. Except for which stocks BRK was buying, no question was taboo.

Here’s some interesting points from meeting:

1. Most of what you learn about Business school is crap.

You only need 2 courses, how to value a business and how to think about stock market fluctuations. Unfortunately most professors end up teaching what they know, which consists of complex formulas and other useless stuff.

I kind of knew this, even though I am going to start B-school in the fall.

2. Develop good communication skills.

That’ll be useful in life regardless of what you do.

3. Non-professional investors should diversify their investments, both in terms of stocks and also in terms of time.

Buffett also recommended buying a low-cost index fund.

4. Be frugal, spend less than you earn, and invest a portion of your income.

5. The best investments are simple ones.

If an investment is overly complex it is usually never a good one. Buffett invested millions in PetroChina (PTR) after only reading the annual report. He realized the business was worth several times more than its current stock value and that there was sufficient margin of safety to invest.

6. Always be ethical and honest in your business deals.

All of the managers of the individual business owned by bRK are upright and ethical. As a result, Buffett doesn’t feel the need to micro-manage them and lets them do whatever they want. This fits in well with BRK’s philosophy. Whenever Buffett and Munger agree to buy a business, its set in stone. Whether there is “a nuclear explosion in New York, a flu epidemmic or Federal Chairmain Ben Bernanke runs off with Paris Hilton to South America“, the deal will go through. Yes, he actually said that.

7. Invest in yourself.

A person’s potential always greatly exceeds his realized performance. Invest in yourself and try to maximize your performance.

8. Read good books.

Two of the books Munger recommends are Yes and Influence. I strongly recommend Poor Charlie’s Almanack: The Wit and Wisdom of Charles T Munger, which is a beautiful hardcover book filled with Munger’s wit & wisdom. It also makes a great gift. One of my friends even called it one of the “all time best finance books“.

9. America is a rich country and may not need to save as much as other countries.

Maybe saving money isn’t necessary for the US, although it does look like we’re exporting ownership in US assets which is not good.

10. Financial innovation for risk diversification should be banned.

The current credit crisis and meltdown in the banking sector was caused by innovative financial products that were designed to make money for the financial institutions. Munger said that the online grocery delivery company, WebVan was a pretty asinine idea, but compared to the current bankers, those execs looked like geniuses!

11. The US Dollar is likely to weaken over the next decade.

A lot of BRK’s businesses have global sales, so a weakening dollar will result in improved profits. For example, BRK owns 200 million shares of Coke, of which 80% of its income comes from global sales.

12. We’re likely to see very high inflation over the next several years.

Inflation is bad, but BRK will profit more, than if there was no inflation.

13. Don’t buy BRK stock.

If you have time to go through the universe of stocks and pick winners, then do that instead of investing in BRK. BRK can only buy huge companies because buying a small company barely puts a dent in the annual revenue. You might be able to get better returns on your own.

Of course, there were several hours of Q & A so this is just a small tidbit. If you’d like to read the whole script you can do so at The Investment Advice of Warren Buffett.

The Annual Shareholder Meeting for Berkshire Hathaway is this Saturday on May 3rd in Omaha, Nebraska. I finally got my meeting credentials from the company. I had been waiting to book my tickets until I got them. It seems I could’ve gotten them in Omaha itself, but I didn’t want to take that risk. It would be pretty stupid if I showed up and they didn’t grant me admission!

Anyway, I’ve been following the online airline prices for flights to Omaha. Two weeks ago, the flights cost around $350 round-trip to Omaha from San Diego. Last Friday and Saturday the cheapest tickets on Orbitz were going for $505. Today, however, the price dropped down to $240! That’s half-price from just two days ago. Now of course, the next challenge is getting accomodation.

Apparently, hotels in the entire city of Omaha are sold out. The nearest hotel room is about 50 miles away in Lincoln, Nebraska! Luckily I found a couch at a friend of a friend’s place that’s only 3 miles away from the Qwest Center (which is where the shareholder meeting is going to take place).

I’m really excited to be going. I’m pretty keen on hearing what Buffett has to say about the bid for Wrigley’s. I also expect to meet a lot of other investors and make some new friends.

If any of you are going to be there, drop me a line and maybe we can meet up.

Its not often that Warren Buffett offers investing advice that’s easily to implement. According to an email I just got yesterday,

“We are still negative on the dollar,” Buffett continued, shifting his focus to Berkshire’s strategy for dealing with the troubled U.S. currency. “We bought stocks in companies that are earning their money in other currencies. We are gaining foreign currency exposure.” His comments echo Jim Rogers’ and Julian Robertson’s bearishness from yesterday.

So where will the $52 billion man be putting his money?

“My impression is that the Korean market is modestly cheaper than other markets in the world. I think the Korean market will do better for the next 10 years,” said Buffett. The Oracle of Omaha is currently visiting the TaeguTec facility in Daegu, South Korea. TaeguTec is a subsidiary of Iscar — a company Berkshire Hathaway bought a $4 billion stake in last year. While there, he voiced his approval of South Korean steelmaker Posco.

“It’s a great company,” Buffett said of Posco, “and great companies get worth more and more all the time.”

I had recently sold half my PTR stake and bought ICON Asia-Pacific Region S Fund(ICARX), which has quite a few korean companies in it. But if you want to get a pure Korean play, iShares MSCI South Korea Index (EWY) is a good buy. Its up 40%+ YTD!

Another good buy is the Korea Fund (KF). Like EWY, its also up 40%+ YTD. I bought a little bit today since its paying a crazy 32% dividend and today its going ex-dividend (which means its the last day to buy it and get the dividend).

If you’d like to buy it, it should trade at a 32% discount on Monday (since it’ll be ex-dividend, it will most likely drop by the amount of the dividend) even though the dividend won’t be paid out until end of November.

The advantage to buying right before the dividend is that sometimes stocks don’t drop the full amount of the dividend or they quickly make up the loss in share price. The disadvantage is you’re slapped with a dividend and a tax liability immediately.

Maybe I’ll sell the other half of PTR and buy EWY as well. Although, according to ETFConnect, KF trades at a 5% discount to NAV, while EWY trades at a 1% premium.

But regardless of what you buy, you’ve been given a chance to invest like Buffett.

Sometimes your best investments are the ones you don’t make.
Donald Trump

I buy expensive suits. They just look cheap on me.
Warren Buffett

There’s nothing wrong with getting fired.
Ted Turner

The consumer isn’t a moron; she is your wife.
David Ogilvy

My son is now an “entrepreneur.” That’s what you’re called when you don’t have a job.
Ted Turner