Monday, May 28, 2012

Warren Buffet, on stocks, gold, and land.



            I had the tube set on CNBC a few weeks ago, and as I heard that Mr. Buffet will speak soon, I made sure to stop what I was doing, so I could watch.  It is never a bad thing to listen to someone, who has achieved and lived through so much.

            There are three main themes that Mr. Buffet spoke about.  Stocks, gold and he briefly touched on farmland.  The reason I am writing this article is because I disagree with his views on two out of these three subjects, and the third subject, I do agree on, I feel people need to be much more aware of.  The reason I believe that it is necessary to talk about his views, is because we need to have a perspective offered for the average person, which is something that Mr. Buffet does not offer.  Let us face it, his current views and choices are a reflection of a multi-billionaire, who is in charge of Berkshire Hathaway.  When they invest, they get to often ask for preferred shares, with certain strings attached in their favor.  They also have some of the best analysts out there watching out for their investments.  When they invest in a company, and they announce it, that company instantly improves its chances of doing better, because their investments act as a vote of confidence.  Lastly, Mr. Buffet is elderly and insanely rich.  If his investments turn sour, I doubt he will lose much sleep over it.  The average person does not fit any of these categories, except for maybe the elderly part.  The average person has different choices available to him/her, and we are living in very different circumstances.  No one cares if Joe, Peter, or Zoltan Ban decides to buy shares in a company, and it most certainly does not help improve that company’s reputation.  So let us examine each subject from a mortal’s perspective.

Gold:

            Yes, I do own some and I intend to hold on to it.  So, given that Mr. Buffet is very vocal about talking it down, it is natural that I should disagree with him.  My last purchase of gold was in the fall of 2008, at a price of about $850.  Needless to say that given the price range it is in at $1500-1600 currently, I don’t feel all that bad about having bought into it.  Nor am I feeling all that distressed by its recent volatility.  Price may go up or down 10% or more, but at this point, it would have to retreat much further than it is likely to, before I start losing money. 

            Mr. Buffet objects to holding this asset on the grounds that unlike holding stocks, it is a non-productive asset.  In other words, a stock is backed by production of a good that is in market demand.  Farmland’s obvious value is that it is the asset that makes the production of food possible.  Gold he argues does not create any value added.  It does not produce anything.  He also strengthens his argument by comparing long term progress of gold prices versus stocks, where stocks obviously have an advantage.

            Like I said, I do own some gold.  I started buying in 2007, and I have to say that since then, there is not one major stock index in the western world, which to my knowledge has outperformed gold.  The Dow Jones index for instance has not changed since then, while gold has doubled in price.  There are of course individual stocks that performed much better than gold.  I should point out however that there are few investors out there who regularly outperformed the broader stock market.

            While it is true that I have an interest to talk up the price of gold, it is also true that Mr.  Buffet needs to talk gold down and stocks up.  He is after all heavily invested in stocks, and when money is parked in gold, it is bad for stocks, because there is less money in play to make stocks go higher.  In reality however, investing in gold is no different than holding cash, and many investors have chosen to do that lately.  Some invest in safe heaven and stronger currencies, such as Swiss franks, or Canadian and Australian dollars, others choose to invest in gold, or silver.  The rise in the price of gold from about $300 an ounce over a decade ago, to over $1500 currently is a no confidence vote in the global economy and national currencies.  If there are some new developments that will stabilize the global economy and provide us with a path towards sustainable growth, then perhaps it will be time to sell gold, and put our confidence back in stocks.  That is a far away possibility however, and at this point, I am becoming increasingly skeptical about solving the underlying problems that currently prevent the economy from firing on all cylinders. 

As we get busy talking about the merit of arguments coming from left and right, mainly focused on levels of taxation, government borrowing and spending, we lose sight of the fact that the underlying problem we are not addressing, which is a real dampener on growth is being ignored, due to the fact that the solution to it does not fit either ideological model.  The main drag on growth for the past decade has been resource scarcity, and the only solution is a global mechanism meant to encourage the economy to add far more value to the raw materials we consume.  In other words we have to get more out of less.  There is no chance of such a mechanism being implemented any time soon, so gold will remain a solid investment for the duration it will take for us to get it together and move to tackle the real problem.

Farmland:

            Mr. Buffet mentioned very briefly farmland during his interview, basically saying that it is an investment that is likely to prove itself more valuable than gold.  On this one I agree with him, but I feel we need to look at this asset in more detail.  Furthermore, I think it is important for young people to realize the potential opportunity farming can hold for their future.  The western world is now in a centuries old trend of urbanization.  We are now at the point where there is no more urbanization to be had.  There is in fact a great opportunity for young people to take advantage of the fact that the average age of our farmers is now about 60, so there is therefore great potential demand for young people to take over.  Owning a farm is in no way inferior to owning any other small business.  One is basically self-employed.  There are in fact advantages, because there is never a large decline in demand for what farmers have to offer, which is more than we can say for most non-farm related businesses and self employed trades, especially since the recent volatility and lack of global economic expansion.

            Owning this small business is especially attractive now that food prices have advanced by about 150% over the last decade, so in effect the average revenue of a farmer also rose by that much.  It is true that the price of inputs such as oil and fertilizers also rose, but still the net profit, did rise considerably.  There is little chance of food prices declining in the foreseeable future.  The world’s population is growing by about 80 million new mouths every year.  The world’s middle class is growing together with the power of new emerging nations such as India, China and Brazil, as well as a host of smaller nations, which are growing at an impressive rate.  All these people are demanding to eat food items such as meat, which demands a much higher farmland surface to grow, per unit of calorie provided to the consumer.  While demand for what the land has to offer is still growing rapidly, the amount of farmland available is not growing at all.  Where there are still opportunities to add fresh farmland, it is of marginal quality.  Land productivity increases are also showing a trend of moving towards stagnation in the medium term, and probably decline in the long term.  A UN study released in 2011 has found that ¼ of all farmland in the world is now badly degraded.

So, while the business of farming is a lot about sweaty summer days, mud, manure, dust, hard work, lack of urban excitement, there are also benefits that urban living cannot provide.  First of all, it is a healthier lifestyle physically and mentally.  Second of all, it is a business with a future.  Third, it provides much more stability.  The fact that half of all fresh university undergrads are unemployed, or under-employed in the US, should be a real wakeup call for young people about the fact that it is time to seek out new opportunities, different than the path their parents would have chosen.  Reality is that in the current environment, an education is in most cases no longer a way to go up the social ladder.  Aside from the necessary education, one also needs to know the right people, who can give them the necessary sponsorship (nepotism).  We live in a different world, those who realize it, and chose to seize the moment will benefit greatly, while the ones who fail to, will be left holding the bag.  Personally, I believe people in the western world will fail to seize on this opportunity, leaving the door open for others to come and take over this opportunity for a better life.

Stocks:

            Mr. Buffet loves stocks, and he is not afraid to say it.  If I would have purchased into the market in the spring of 2009, perhaps I would love stocks as well.  We ordinary people, not involved in being full time investors do not have the foresight to seek such moments of opportunity.  In fact, many professional investors lost a lot of money as they were fishing for that spring of 2009 bottom, so what chance would an average individual have?  Most people buy into pension funds, mutual funds and other investment vehicles, meant to allow people to invest and forget about it, while “professionals” take care of their portfolio.  A few adventurous individuals decide to pick individual stocks on their own.  Some people do OK, others not so much.  The best we commoners can do in most cases however is do as well as the broader market.  If one looks at recent historical charts however, it becomes clear that those who have been investing for the last five years, or even in the past decade have not done so well.  So while people like Mr. Buffet may have the tools to beat the market ( Berkshire Hathaway did not beat in the past five years), we do not in most cases, and when we do, it may just be blind luck.

Conclusions:

            Mr. Warren Buffet is certainly a very intelligent, generous, charismatic individual, and no one can take away from his lifetime accomplishments.  At this point however we have to recognize that the wisdom of Mr. Buffet belongs to a bygone era.  The 21’th century will not be similar to the 20’th.  The world had different problems then than now.  It is important for individuals and societies to realize that the adaptations that made people great then, may not be as valuable today.   

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