Wednesday, December 28, 2011

Buffett on Gold, Farms, and Businesses

From an interview in Fortune with Warren Buffett back in 2010:

"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take?"

Buffett goes on to say he prefers equities.

Keep in mind he said the above when gold was much lower than it is today.

More recently, Buffett added the following during this CNBC interview:

Joe Kernen: You have said many times that if you could own, vs. gold, all the farmland in the United States, you'd rather have that than all the gold in the world. Have you gone in and looked at any farmland, any real estate like that?

Warren Buffett: No. I own one farm that I bought about 25 years ago my son farms, and so we're exposed to farming in the Buffett family. He's going to take care of me if it turns out that farms are really the thing to have instead of businesses. But I believe in owning productive assets...whether it's farms, apartment houses or businesses. And they'll do very well over time, and sometimes one class is doing better than another.

When Buffett says that he likes businesses that naturally includes stocks which are, simply put, the convenient partial ownership of businesses. In the late 90s, before one of the worst decade for stocks was about to occur, Buffett warned that equities were overvalued and that future returns were likely to be sub-par.

Buffett on Stock Valuations

Here's a good description of the situation at that time:

"Buffett was skeptical of high-tech stocks and...warned of an overvalued market that was heading for trouble. In fact, at that famous summer gathering of media, technology and financial moguls at Sun Valley, Idaho, Warren Buffett was asked to give the concluding talk in July 1999. His remarks, though politely received, supported the view among the smart set that Buffett was out of touch with the 'new paradigm' of high technology and ever-rising internet stock valuations.

Buffett's talk...delivered a message that most of his high-tech listeners and their financial sidekicks were not keen to hear. There was no 'new paradigm,' Buffett said. The market could only yield what the economy produced, and this market was way out of sync in that respect. The next seventeen years, he explained, might not look much better than the dismal 1964-to-1981 period when the Dow had gone exactly nowhere."

These two articles also help capture and summarize what Buffett said in Sun Valley and just how he was thinking back then:*

Buffett in Fortune - 1999

Warren Buffett "Preaches" to 1999's Internet Elite

When equity investors could only see blue skies and sky high returns going forward, Buffett was warning of trouble ahead. Well, it hasn't been 17 years yet -- nor does it need to end up being precisely 17 years for his essential view to end up being correct -- but so far the market has, in fact, pretty much gone nowhere.

At that time, not many seemed interested in giving his warning much weight.

Now, when many investors seem to want nothing to do with equities, Buffett is generally bullish on stocks.**

Based upon track record who's more likely to be correct?

Ten or so years from now will it be obvious that the same mistake, only in reverse, was being made?

Adam

Related posts:
-Edison on Gold: Fictitious Value & Superstition
-Munger on Buying Gold
-Thomas Edison on Gold
-Grantham on Gold: The "Faith-based Metal"
-Buffett: Forget Gold, Buy Stocks
-Gold vs Productive Assets
-Grantham: Gold is "Last Refuge of the Desperate"
-Why Buffett's Not a Big Fan of Gold

* The 1999 speech in Sun Valley was covered in Chapter 2 of 'The Snowball'.
** As always, the investing horizon has to be at least five years and more like ten years. It's about growth in intrinsic value over a long period not the price action (up or down) in a week, month, or even a couple years. What matters is the compounded return that can be produced for the risk that is taken. Near current valuations, likely risk-adjusted returns make some stocks very attractive. As always, paying a plain discount to value helps regulate the risk.
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