Gold-vs-Berkshire-Hathaway by xiaopangnv



Jim Slater on why he’s still keen on gold, even if others aren’t

            on’t get me wrong. I have the greatest respect   cent gain doesn’t compare well with the 166 per cent
            for Warren Buffett and his close associate        appreciation enjoyed by the “jerks” who bought gold five
            Charlie Munger. There’s no doubt that the        years ago. That’s 4.6 times what Berkshire Hathaway’s
            investment company they run, Berkshire           shares have returned. It must have escaped Mr Munger’s
Hathaway, has been fantastically successful over its         attention that gold cannot be judged today in the same
long life. Many of the duo’s folksy truisms on invest-       way as five years ago. There have been a number of devel-
ing are well-known around the world; my particular           opments of great importance:
favourites include “not all earnings are created equal”      1) Exchange-traded funds have made it possible for
and “value and growth investing are joined at the hip”.      the man in the street to buy physical gold easily with-
    But much of Berkshire’s outperformance came in its       out being regarded as a crank hoarding coins buried
earlier decades. Returns lately have been rather more        in a tin box in the garden.
subdued – which is why it’s odd that Mr Munger in            2) With interest rates now ultra-low thanks to global
particular has been so dismissive of investment in other     central bank largesse, the opportunity cost of holding
asset classes, specifically gold (see quote on page 28).      gold is negligible.
    I beg to differ. I’ve been a gold enthusiast for years,   3) The Chinese government in recent years has been
and I and many others have done very well out of             encouraging its population to buy gold bars and gold
it. As I began to assemble my arguments, I became            coins as part of their personal savings programmes.
increasingly interested in the recent relative invest-       During the first 10 months of 2010, China imported 209.7
ment performance of Berkshire Hathaway’s shares.             metric tons of gold – a fivefold increase over 2009.
    During the past five years, they have appreciated by      4) Central banks, alarmed by the weakness of the
36 per cent compared with 11 per cent for the S&P 500        dollar and deteriorating US public finances, are
with after-tax dividends reinvested. This is a very good     beginning to see gold as an alternative currency with
performance bearing in mind that many US investment          several of them now buying instead of selling.
managers lost money during this turbulent period.            5) US national debt has risen to $14 trillion, and Dallas
However, to some degree you’d expect that, since Mr          Federal Reserve president Richard Fisher calculates that
Buffett is not just another investment manager. His repu-     the “unfunded debt of Social Security and Medicare
tation gives him an edge. When he invests in a company,         combined has now reached $104 trillion”. How else
such as BYD in China, his involvement encourages                   can this be paid back without dollar devaluation?
many other investors to follow suit, providing                       6) Other major currencies have problems of
him with a strong tailwind. His status also ena-                      their own. Indeed, there has rarely been such
bles him to negotiate very advantageous deals,                        a time when almost all paper currencies look
which other investors would find impossible to                          so doubtful.
emulate. Look at his investment in Goldman                                In short, the world has changed radically,
Sachs; at the height of the credit crunch, $5bn                        and I would put it to Mr Munger that, given
secured him preferred shares with a 10 per                             the developments above, holding gold is actu-
cent guaranteed dividend together with $5bn                            ally very rational.
of warrants. The very next day, other investors                            Gold is not alone in massively outperform-
bought common stock at the same price in a                              ing Berkshire Hathaway’s shares. The entire
fund-raising – without the 10 per cent guaran-                          commodity complex has done so (see chart
teed dividend, and without the free warrants.                            on page 28). Base metals have gained an
    And even with those advantages, a 36 per                             average 131 per cent; even lowly tin, used for

                                                                                   FEB    FEB     INVESTORS CHRONICLE

food tins and solder, has almost quadrupled. In pre-         the largest oil company in China. It also has stakes in
cious metals, silver was up a stellar 244 per cent and       South Korean steel-maker Posco and French pharma                                       “I don’t have the
platinum 83 per cent while oil lagged behind up only         group Sanofi-Aventis.
46 per cent.                                                     In 2007, Warren Buffett made a major currency bet
                                                                                                                                                    slightest interest
    You might think it unfair of me to compare the           on the Brazilian real. He told his adoring stockhold-                                  in gold. If you’re
performance of Berkshire Hathaway’s shares with              ers at the Berkshire Hathaway annual meeting that it                                   capable of un-
commodities – after all, they are very different propo-       would “surprise” them, and it was a very good choice.                                  derstanding the
sitions. So look at equities. The second chart shows         Also, between 1997 and 2006, Berkshire Hathaway
what happened in US dollar terms in world stock              accumulated 130m ounces of silver, a significant pro-
                                                                                                                                                    world, you have
markets. Berkshire may have beaten the US market,            portion of the world’s yearly supply – although he sold                                a moral obliga-
but Brazil was the leader with a gain of 171 per cent        out much too soon. As Mr Buffett is fond of saying,                                     tion to become
followed closely by China, Malaysia and India. Japan         things are always clearer in the rear-view mirror.                                     rational. And I
and the UK were the most disappointing with losses                The internationalisation of Berkshire Hathaway
                                                                                                                                                    don’t see how
of 12 per cent and 3 per cent, respectively but even the     suggests to me that its performance should be judged
average was 71 per cent – almost double 36 per cent          on a world stage, not a domestic one. On the evidence                                  you become
for Berkshire Hathaway shares.                               of the figures above, it has some catching up to do.                                    rational hoard-
    Messrs Buffett and Munger are long-term investors,            The American Heritage dictionary defines a jerk as:                                 ing gold. Even if
famously remarking that they buy shares on the basis         “a contemptibly naïve, fatuous, foolish, or inconse-                                   it works, you’re
that the market might close the following day and not        quential person”. I am sure that Charlie Munger could
reopen for five years. But the comparative performances       not have had John Paulson in mind when he used the
                                                                                                                                                    a jerk.”
over 10 years are even more compelling. The price of         word. This investment titan, unlike most fund manag-                                   CHARLIE MUNGER
Berkshire Hathaway’s shares increased by only 67 per         ers, anticipated the credit crunch and made a fortune
cent against gold’s 428 per cent, so gold was a massive      during it. He is well known now for his present enthu-
6.4 times better. The average of all of the commodities in   siasm for gold.
the table was 346 per cent – that’s 5.2 times better than        In conclusion, I believe that Mr Munger should be
Berkshire Hathaway’s shares. Hats off to Jim Rogers!          more open-minded and less parochial, and I’d remind
    Once again, the UK is the sick man among world           him of his own advice: “Recognise reality even when
stock markets, underperforming even Japan. But emerg-        you don’t like it – especially when you don’t like it”.
ing markets have turned in awesome performances,             Jim Slater tends to invest in gold via shares in gold mining
especially the so-called Brics – so well done Jim O’Neill!   companies. Visit for details of his
The average gain was a whopping 254 per cent – 3.8           criteria for investing and some of his current favourites.
times better than Berkshire Hathaway’s shares.
    You might argue that Mr Munger and Mr Buffett              Berkshire vs durable commodities ($)
have no control over Berkshire Hathaway’s share
price – the market sets that. So consider something
they do control, namely the net asset value (NAV) of
the shares. During the last 10 years the NAV per share

(currently including $49bn of goodwill) has risen by               Gold

132 per cent. Taking that figure improves Berkshire                   Tin

Hathaway’s comparative performance. However, the                  Nickel

average overseas stock market with 254 per cent still            Oil-WTI

beat Berkshire Hathaway 1.9 times and the average              Platinum                                                              10 yrs

commodity with 346 per cent by 2.6 times. And gold,                 Zinc                                                             5 yrs

the investment of choice for irrational jerks, is still in     Berkshire

a class of its own with 428 per cent – 3.2 times better                      0           100      200        300        400         500       600

                                                                                                 % gain to Jan 2011
than Berkshire Hathaway.
    Asian-based analyst Marc Faber has offered an expla-
nation for why a company like Berkshire Hathaway can          Berkshire vs representative world markets
                                                              All returns are in US$ with after-tax dividends reinvested
do well in its own backyard, but compares poorly in
international terms. He wonders how long it will take                       Brazil
for Mr Munger and fund managers like him to look in                         India

the mirror, face the truth and ask themselves why their                Mexico
performance in paper confetti terms is okay but is a                        China

disaster in terms of hard currencies. When they do,                  Australia
he says, the game will be up for many fund managers,                Singapore

whom he describes as “paper shufflers”.                                  Canada
                                                                                                                                    10 yrs
                                                                   Hong Kong
    In fairness, a dearth of domestic investment                    Berkshire
                                                                    Berkshire                                                       5 yrs

opportunities has led Berkshire to look overseas. In                 Germany

2006, it purchased 80 per cent of Iscar Metalworking,                   France
a toolmaking company in Israel, and this was fol-             United Kingdom

lowed in recent years by Chinese investments: BYD,                   -100            0     100      200    300        400     500     600     700

                                                                                                  % gain to Jan 2011
the battery and car manufacturer, and PetroChina,


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