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Source link: http://archive.mises.org/9732/the-trouble-with-warren-buffett/

The Trouble with Warren Buffett

April 3, 2009 by

Warren Buffett

A junior high investment club wrote in to CNBC’s Squawk Box to ask legendary investor Warren Buffett what he thought the price of gold would be in five years and whether the yellow metal should be a part of value investing. Obviously the junior high kids have been educated that inflation is coming down the pike given the massive monetary stimulus that the Federal Reserve is engineering. So it’s perfectly reasonable that they would pose their question to the world’s greatest investor. But Buffett doesn’t understand that gold is the people’s money. FULL ARTICLE

{ 58 comments }

Freeman April 5, 2009 at 5:11 pm

Sorry, but there was a typo in my comments. Berkshire Hathaway A-shares peaked at 147 thousand dollars, not 174. They bottomed at half that, and have been pretty much tracking the level of federal bailout spending since then.

BRK just received a ratings company downgrade as well, nothing serious, just a sign that the mighty may just be mortal after all…

Jeremy April 6, 2009 at 7:57 am

Jake – That’s a good question – you could say look at what it could buy over time (and by that measure gold seems a lot more expensive these days) but then you get stuck trying to figure out whether gold is in a bubble or the dollar is.

ABCT sheds some light on the issue, and those who believe in it are mostly saying that the actions taking place right now will tank the dollar, but that still doesn’t give a clear answer of when gold is too expensive.

From a fundamental standpoint, gold is too expensive when other things with intrinsic value become much cheaper relative to it, which is true today when you look at anything from oil to many foreign equities.

From a psychological standpoint, gold is way too expensive when it is what everyone is buying it hand over fist and when almost everyone thinks it’s a can’t lose investment, and we’re not there yet.

Going by Ben Graham’s methods, I wouldn’t call gold a value investment today, especially with so many other things that are on sale, but I wouldn’t say it’s extraordinarily expensive either.

What do you think?

Vanmind April 6, 2009 at 3:32 pm

Gold is mankind’s true money. That’s all I need to understand.

Jaycephus April 6, 2009 at 7:29 pm

Peter Schiff has a speech or interview talking about WB’s 2003 article on Squander Bucks, and how WB has morphed from the guy who wrote about Squanderville and not buying the US Dollar into the guy that bought the stockmarket at the beginning of a recession.

Regarding such statements as:

“But getting back to gold as a commodity, what uses does it really have other than a few pieces of jewlery?”

…meaning it shouldn’t be selling much higher than quartz or glass beads.

More than one respondant has said something similar to the above, often in the form of “gold has NO intrinsic value.”

But gold has many uses, and even if ‘gold bugs’ came to their ‘senses’ tomorrow, the price of gold can NOT fall below silver. With just it’s industrial uses AND jewelry demand, it simply can’t get anywhere near as cheap as silver, even IF everyone started loosing their faith in gold as money.

And of course, as long as virtually everyone in the world, including central banks, view it as having intrinsic value for just its monetary uses, then it HAS that value.

What’s funny is these statements are usually made by someone defending the PAPER dollar. That is the definition of something that ONLY has value based on the confidence we have that it has some value for its monetary uses.

Paul April 7, 2009 at 2:46 pm

<< Sorry, I need to follow the money! Now I am taking a shot in the dark because I really don't know the price of KO in 1930. But my guess if you invested $35 in gold and $35 in KO in 1930, you would have a lot more money in KO today.

There is a big difference between KO or any other paper asset and gold. There were no guarantees that KO would have been around 10-50 years into the future. At least with gold, it can't be easily created or destroyed.

Paul April 7, 2009 at 3:09 pm

<

I don't think this is correct either. I believe Robert Prechter showed that the largest one day gains (percentage wise) in Dow history happened during the fiercest bear market - 1929-32. Last fall we saw the Dow rally 10% in one day, which also made it one of the biggest ever. The biggest gainers and losers nearly always occur in the middle and end of a major stock market decline. In major bull markets, gains are much more spread out.

Jake Taylor April 7, 2009 at 9:29 pm

Going by Ben Graham’s methods, I wouldn’t call gold a value investment today, especially with so many other things that are on sale, but I wouldn’t say it’s extraordinarily expensive either.

What do you think?
—————————————————————
That was my problem; I could never come up with an intrinsic value, therefore I stayed away. Now if there was a company selling that owned X amount of gold that was selling for .5X, I’d be very interested. But paying $1 for $1 worth of gold doesn’t make sense to me. At 50 cents, I now have a market value to use as reference against. But I sort of feel like my arguments are not of much interest to most on this particular subject. No matter. :)

Chris Donabedian April 10, 2009 at 1:56 pm

It would be interesting for a Mises author to discuss Mr. Buffet’s, as well as others like him, irrational tendency to support socialist polcies and politicians, while benefitting from what remains of capitalism. They regularly oppose the very system that made their success possible: capitalism.

One can go back to Buffet’s earlier years and see that he was always acutely aware of the threats of inflation, he warned of it openly and invested accordingly, always preferring stocks of companies that had ‘pricing power’, the ability to raise prices and keep pace with inflation.

In his defense, I think French is misunderstanding Buffet’s position. What Buffet is saying is that there is a price at which gold has already factored in the future inflation, it’s no secret that we will have inflation, and that is why buyers of gold have already bid gold to where it is today. To exxagerate, let’s say Gold appreciates yet another 25%. Should one still buy it? At what price would French say Gold is no longer a good place to put one’s dollars? History has also showed that buying gold at the “top” has been a very painful for experience as well.

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