Timing & trends
“As we never tire of observing, gold has delivered a much higher return during the last 15 years than Berkshire Hathaway, perhaps the most civilized of American stocks. By any quantitative measure, gold has kicked Berkshire’s rear-end from wherever you happen to be reading this column all the way back to Omaha, Nebraska.”
Gold is “forever unproductive,” says Warren Buffett, CEO of Berkshire Hathaway.
“Civilized people don’t buy gold,” says Buffett’s sidekick, Charlie Munger. Civilized people, says Munger, “invest in productive businesses.”
So let’s see… Where does that lead us?
If…
A) Berkshire Hathaway invests in productive businesses and;
B) Investing in productive businesses is civilized and;
C) Warren Buffett and Charlie Munger direct Berkshire’s investments;
Then…
D) Buffett and Munger are civilized.
Gee whiz! That’s lucky!
But to make sure the world appreciates just how civilized these two civilized gents are, they continuously (and very publicly) belittle both gold and the uncivilized masses who consider it a store of value.Gee whiz! That’s lucky!
“Gold gets dug out of the ground,” Warren Buffett famously observed, “then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Yes, that’s right, anyone from Mars…or from Berkshire Hathaway headquarters. But most of the other seven billion folks residing on either Earth or Mars understand that gold has at least some utility. At a minimum, they understand that gold possesses more utility than the gold-bashing blather that spills from the lips of Buffett and Munger. Gold may be inert, but at least it’s not toxic.
“When it comes to bashing gold,” writes Eric McWhinnie for Wall St. Cheat Sheet, “few do it as publicly and extremely as the crew at Berkshire Hathaway… Buffett dedicated a decent part of his latest shareholder letter to criticizing gold. He painted an analogy of the world’s gold stock as a useless cube that would fit within a baseball infield. 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?
Ummm…maybe…depending on the circumstances in which one finds oneself.
Even Charlie Munger acknowledges that “gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939.” Although Munger’s tasteless remark was an attempt to disparage gold, he inadvertently paid the monetary metal a compliment. He acknowledged that gold is the “go to” investment during times of crisis. It is the thing to own in uncivilized times.
Clearly, gold was not the very best thing to own when the young Buffett and Munger were launching their careers — a period that happened to coincide with America’s post-WWII, once-in-an-empire, economic boom. At the end of the Second World War, the United States possessed a robust manufacturing infrastructure; its competitors possessed ruble. Not a bad time to invest in America’s “productive businesses.”
But not every investor will find himself in the midst of one of the most powerful, world-dominating economic expansions in human history. Instead, some investors may find themselves in some sort of “Vienna, 1939.” In such circumstances, the ideal investment may not be a share of Coca-Cola…or even a share of Apple (more about which below). It may be an ounce of gold.
“Some Jews in Vienna in 1939 operated extremely productive businesses,” we observed in the May 24 edition of The Daily Reckoning. “Unfortunately, they could not stitch any of those into their garments.”
But gold is not merely a great thing to own amidst extreme circumstances. It can also be a great thing to own amidst merely marginal circumstances, like, for example, if you happen to be living during the tail end of one of the most powerful, world- dominating economic expansions in human history…rather than at the beginning of it. In other words, gold may be a great thing to own in America in 2012 — no matter whether you be Jewish, Christian, atheist or spiritually confused.
“As civilizations lose their civility,” we observed a few days ago, “investing in productive businesses can be a very unproductive activity. As civilizations lose their civility, share prices tend to fall and gold prices tend to rise…which is exactly what has been happening in our beloved U.S.A during the last few years.”
Thus, as we never tire of observing, gold has delivered a much higher return during the last 15 years than Berkshire Hathaway, perhaps the most civilized of American stocks. By any quantitative measure, gold has kicked Berkshire’s rear-end from wherever you happen to be reading this column all the way back to Omaha, Nebraska.
Unlike Buffett and Munger, David Einhorn, founder of Greenlight Capital, believes we Americans are in an era in which gold is likely to reward those who hold it. He recently countered Buffett’s “analysis” of gold by saying, “If you wrapped up all the $100 bills in circulation, they would form a cube about 74 feet per side… The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing… It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat… Alternatively, you could take every US 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.”
Einhorn’s dig at the Berkshire boys is merely his latest counter- punch against the anti-gold elite. A few weeks back, he likened Fed Chairman Ben Bernanke’s monetary policy to gorging on jelly donuts.
“A jelly donut is a yummy mid-afternoon energy boost,” Einhorn explained. “Two jelly donuts are an indulgent breakfast. Three jelly donuts may induce a tummy ache. Six jelly donuts, that’s an eating disorder. Twelve jelly donuts is fraternity pledge hazing.
“My point,” Einhorn elaborated, “is that you can have too much of a good thing… Chairman Bernanke is presently force-feeding us what seems like the 36th jelly donut of easy money and wondering why it isn’t giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish…”
“As a result,” Einhorn concluded, “I will keep a substantial long exposure to gold, which serves as a jelly-donut-antidote for my portfolio.”
Like Einhorn, many other high-profile hedge fund managers are amassing large quantities of gold and gold-related investments. According to filings with the Securities and Exchange Commission, several big hedge funds upped their allocation to gold during the first three months of 2012. Billionaire fund manager John Paulson, for example, maintained his large 17.3 million-share position in the SPDR Gold Trust (NYSE:GLD). He also upped his holding of NovaGold Resources (NYSE:NG) and IAMGOLD (NYSE:IAG).
Daniel Loeb’s Third Point hedge fund maintained its position in “GLD,” while boosting its stake in Barrick Gold (NYSE:ABX). George Soros’ management firm nearly quadrupled its exposure to “GLD” during the first quarter, while also buying call options on Newmont Mining (NYSE:NEM).
Those guys aren’t buying gold because they expect it to be “forever unproductive,” as Buffett asserts, or because it is only useful during a Nazi occupation, as Munger asserts. They are buying it because they believe the American economy of the near-future will not treat investment capital as hospitably as the American economy of the last several decades.
They are buying it because they perceive that important aspects of American civilization are becoming somewhat more barbaric…like, for example, the barbaric fiscal policies that never fail to produce trillion-dollar deficits, or the barbaric monetary policies that always fail to produce sustainable economic activity.
Barbarous times call for barbarous measures.
Regards,
Eric J. Fry
for The Daily Reckoning
[Joel’s Note: Obviously, Dear Reader, the Berkshire Boys are not the only folks pooh-poohing gold these days. In fact, bashing gold is something of a daily Wall Street pastime. And even those folks who feel no need to bash gold are quite content to ignore it. They’d rather buy a “hot stock” like Facebook…ugh…or maybe a proven winner like Apple.
We have no idea who’s right or wrong here or, more importantly, who will be right or wrong going forward. But we’d love to hear your thoughts on the subject…just for kicks. We’d like to hear from you whether gold or Apple will be the better bet over the next five years.
Matt Nesto posed this identical question a couple days ago to his guest on “Breakout,” Lee Munson, Chief Investment Officer at Portfolio, LLC. Munson responded unequivocally, “I’d rather you go out…and buy Apple.” As for gold, Munson scoffed, “When the world looks to be ending, like 2008, people aren’t going to buy gold, they’re going to buy dollars, and if things really get bad, they’ll buy dry food and automatic guns.”
What about you, Dear Readers? Do you side with Munson (and Buffett and Munger)? Or do you think gold might be the better bet? Or maybe you are conflicted, just like Daniel Loeb, the hedge fund manager Eric cites in his column. Although gold is the second largest holding in Mr. Loeb’s hedge fund, Apple is the fourth largest holding. Hmmm…maybe that’s the perfect hedge. Anyway, we’d love to hear your thoughts.]
Our good friend Kevin Konar of RBC Dominion Securities is hosting a special seminar on Saturday, June 16th in West Vancouver entitled “Investing for Income – What you need to know TODAY to Increase Income, Reduce Taxes and Minimize Risk.”
Kevin has been gracious enough to set aside some FREE seats exclusively for our MoneyTalks audience. If you live in the Lower Mainland we highly recommend that you take advantage of this opportunity. Michael Campbell asked Kevin to present on this topic last February at the 2012 World Outlook Financial Conference and this seminar is an expanded version of that presentation. Seating is limited.
Date: June 16th, 2012
Time: 10:30am
Location: Welsh Hall – West Vancouver Public Library – 1950 Marine Drive, West Vancouver (enter library via main entrance, Welsh Hall is downstairs on the bottom floor)
There is a parking lot beside the West Van Library that you can enter via Bellevue Street
To confirm your attendance please e-mail Brian Moore at brian.e.moore@rbc.com with your name and contact information. For more detailed information, please call 604-981-6645.
Topics to be discussed include:
– specific income alternatives to today’s low rates
– why dividend income is so crucial for anybody who pays taxes
– time tested investment strategies that minimize risk
– how to invest so that both your income and your capital increases in value over time
– the current outlook for both interest rates and the equity markets
Now that the major stock market indexes are near or at the official “correction” level, that is about 10% below a recent market high – it may be time to get serious about some portfolio hedging. May was a brutal month for the market as the Dow 30 gave up all of its year to date 6%-plus gains. June (so far) doesn’t look too healthy either. Also, the 200 day moving average is in danger of being breached. If the S&P 500 closes below that 200 DMA level for several days, that could trigger even more selling. That 200 DMA is a “line in the sand” to many institutional money managers. Typically the market will try and rally back when that level is reached. The market does not just go straight down or straight up. Expect counter trend rallies. If things deteriorate further here are four Exchange Traded products that could help ease the pain.
….read about the 4 Products HERE
Back when my daughter was born in June of 2007, I used the occasion to talk about the simple investment strategy known as dollar-cost averaging.
And just about every year since then, I’ve used this column to update you on how a hypothetical investor would be faring by using the approach.
As hard as it is for me to believe, the time has already come around again!
Yes, five years have already passed … which really only proves one of the biggest points I continually make here — that because time goes by so quickly, it’s crucial that you plan for the long-term as early as possible.
So without any more sappy thoughts or clichés, let’s turn our attention to what another year of dollar-cost averaging would have done for us.
First, a Quick Recap of What
Dollar-Cost Averaging Is All About!
The idea with dollar-cost averaging is relatively simple: You buy equal dollar amounts of the same investment on a predetermined schedule.
Please note the italics in that last sentence. Dollar-cost averaging IS NOT buying a fixed number of shares on a regular basis. In fact, it is quite the opposite. Here’s why …
Let’s say you’ve decided to invest $10,000 in XYZ Corp. Rather than deploying the entire amount at one time, you might instead opt to purchase $1,000 of XYZ stock on the first day of each of the next 10 months.
What’s the logic behind this approach? Well, you can expect just about any stock’s price to vary substantially over a 10-month period. So, when the price is higher, your $1,000 will buy fewer shares; when the price dips, your $1,000 will buy more shares.
In other words, buying equal dollar amounts over time allows you to reduce your risk to a stock’s short-term price movements, automatically encouraging you to buy more when prices are lower and less when prices are higher.
It also removes much of the emotion from the investing process. You’ve already committed to buying the stock at regular intervals, regardless of market conditions.
And because you’re doing this automatically, it doesn’t require more than a few minutes of your time (if any at all!).
Okay, But How Does This Strategy
Fare When the Road Gets Bumpy?
Obviously, buying bits of stock as the market continually rises would work just fine … even if it meant you missed out on some additional upside by not putting as much in as quickly as possible.
But what about the other scenario — the one where the market really zigs and zags, moves sideways, or even goes lower over a long period of time?
Well, the last five years are a perfect illustration of just such a market!
Take a look at a chart of the S&P 500 since my daughter’s original birthday …
As you can see, despite the huge declines and rallies, the broad U.S. stock market index isSTILL lower than it was five years ago!
And yes, if you’d had very good timing, you could have clearly been making a fortune during every one of those major moves … but what if you didn’t have perfect timing?
Or worse yet, if you had BAD timing?
That’s where dollar-cost averaging comes in. Let’s look at what would have happened if you simply followed this approach over the last five years — investing an equal amount of money in the S&P 500 ETF (SPY) at the beginning of every single month.
It’s a long table, but I want to show you exactly how this works …
As you can see, by putting $1,000 into a broad-based ETF each and every month over the last four years, you would have spent $61,000 to buy a total of 546 shares.
Based on the SPY’s recent price of $128.16, that total stake would currently be worth $70,017 — a total profit of $9,017!
That’s a 14.78 percent return over the five years … even though the market actuallyFELL 14.67 percent over the same time period!
The reason, as I mentioned earlier, is simple: While you would have bought some shares when the market was at its peak, you also would have forced yourself to buy a bunch of shares when the market was much lower than it is today.
Now, let me point out a few more things about these numbers:
FIRST, the overall performance number actually went down from last year’s review (+18.66 percent) and the total profit figure in dollars stayed the same.
In other words, our hypothetical investor didn’t make any additional money over the last year. But he did save another $12,000 and because this is a long-term strategy, I wouldn’t be particularly bothered by a year of flat performance.
SECOND, I’m sure you’ve already realized that on an annual basis, our investor has made a bit less than 3 percent a year. While that isn’t anything to write home about, it IS better than most other conservative investments have been paying … and is at least in line with inflation over the same five-year period.
THIRD, I am NOT holding dollar-cost averaging out to be the end-all-be-all solution.
In fact, I continue to believe that careful timing and superior stock selection will give you even BETTER returns!
[Editor’s note: You can get all of Nilus’ specific recommendations for just $39 a year by clicking here.]
But in the case of buying individual stocks, it’s worth noting that you can apply dollar-cost averaging there just as easily as you can with broad-based ETFs.
In addition, you are also using this same general concept whenever you reinvest your dividend payments or make regular contributions to the same funds in a retirement plan such as a 401(k).
Of course, whether or not you decide to put dollar-cost averaging to work in your portfolio, the important part is remembering that while time often passes more quickly than we might like, the key to success — in both investing and life — is finding a way to capture those key moments that happen along the way.
Best wishes,
Nilus
Nilus Mattive has been obsessed with dividend-paying stocks since the sixth grade. And after graduating from college, he began working for Jono Steinberg’s Individual Investor Group, where he wrote a regular investment column. Later, Nilus spent five years at Standard & Poor’s editing the company’s flagship investment newsletter, The Outlook. During that time, Nilus also penned his first finance book, The Standard & Poor’s Guide for the New Investor. These days, Nilus loves telling investors about dividend-paying stocks in his monthly newsletter, Income Superstars.
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