May 092018

At Berkshire Hathaway’s annual meeting 2018 this weekend, Warren Buffett revealed that $10,000 invested in an S&P 500 index fund in 1942 (there were none at the time, he noted) would be worth $51 million today. However, $10,000 invested in Gold would be approximately $400,000. (This is not the first time Mr Buffett has taken a potshot at Gold, he did the same back in 2012 and I had a blog post

When one is a Billionaire, one can say whatever one wants and try to pass it as wisdom or gospel truth. Let us examine these words of Avuncular Warren a little closer.

First, as Mr Buffett has rightly noted, there were no index funds back in 1942. What is unsaid and absolutely critical is that the first index fund was not around until the 1970's. So an investor would have needed all the sophistication to track the key stocks by market value, assign/reassign weights, balance/re-balance the portfolio and all that jazz that an index fund or an ETF does these days.  Remember, at its 50th anniversary of formation, the S&P500 had just about 80 odd of the original 500, and the 400+ companies had either gone bankrupt, been taken over or dropped off the index. So for 30 years! Was a normal investor expected to do that? How do you think that would have gone? Marquee Company's like Sears, Lehman, Radio Shack which were on the index for 50+ years went bust. Bear in mind, that when an investor looses 10% he/she needs 11.2% to break-even, 25% loss needs 33% to break-even and so on.

Second, it is very very important in the present world of QE, to understand what exactly is a Dollar. Only then can one understand the true value of the $51 million Mr Buffett is talking about. For millennia, real money was backed by tangible goods. Gold and Silver served this purpose. We know from history that President Roosevelt in 1933 and President Nixon in 1971 obliterated the US$ from being honest money. So what exactly is a Dollar backed by? Government bonds. Which is nothing but a promise to pay dollars. A promise on a promise and nothing tangible. Does "I promise to pay the bearer a sum of Rupees..." ring a bell? (And the central bankers call Crypto currencies as a scam!! )

What is a Dollar then? The US Congress describes the Dollar as 1/44.22 an ounce of Gold. That is if you pay $44.22 you can get an ounce or 28.35 gms of gold OR 1kg of gold for $1,560!!  Compare that to actual value of 1kg of gold as on date - $ 42,346!!

Now, why don't someone try taking these fiat dollars to the Treasury or the Fed and try to exchange it for 1kg gold per $1,560? After all these notes are the obligations of the United States of America. You would probably be dispossessed of your money and sent to a mental institution. The dollar had such value once upon a time. Today it has lost somewhere between 85% to 97% of it's value  - don't take my word, pull out the data from Federal Reserve and see for yourself. (From the St Louis Federal Reserve, Title: Board of Governors Monetary Base, Not Adjusted for Changes in Reserve Requirements, Series ID: BOGUMBNS, Source: Board of Governors of the Federal Reserve System, Release: H.3 Aggregate Reserves of Depository Institutions and the Monetary Base)

It is exactly this kind of dilution and dishonesty that Gold stands to protect. And it has. An ounce of gold will fetch a fine Louis Vitton or Hugo Boss suit.

Finally, here is a chart of Gold's performance vs Berkshire Hathway since 2002.

In 2012, gold was crushing the performance of BRK by 420%. Also one can see, Gold is still delivering 70% better returns than BRK since 2002, even after a steep drop from record highs. Buffett's BRK has completely missed the commodity boom. Hence, maybe he has a reputation guard?

Also, Berkshire has a cash reserve of over $100Bln. This reserve needs to go into something productive otherwise this poses a big problem for Buffett, especially if the dollar is going to loose value in the future.



 Posted by at 3:35 am

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