FOFOA vs. Warren Buffett

[sinner]

Boy oh boy, have I been waiting for this one!

My favourite financial blogger continues to break down financial misconception after financial misconception, this time tackling one that is common here on ASF.

http://fofoa.blogspot.com.au/2012/02/yo-warren-b-you-are-so-og.html

I assume lots of people read Warren Bs latest missive in Fortune magazine, rehashing the same tired lines as always. Here is the counterpoint, worth reading every line if you ask me!

FOFOA is not your regular gold bug, I would class him much higher in understanding of macroeconomics, often when reading his blog I find myself thinking of Michael Pettis. His cogency and articulate nature seem unparalleled on any gold blog and his hypothesis is vastly different to what most "gold bugs" think is the truth. He is the only gold commentator I have known to convert a deflationist like Rick Ackermann publicly to his side!

I await a thunderous discussion.

 

[craft]

I await a thunderous discussion.

The thunders pretty quite around here.

This is from the 1979 Berkshire Hathaway letter.

One friendly but sharp-eyed commentator on Berkshire has
pointed out that our book value at the end of 1964 would have
bought about one-half ounce of gold and, fifteen years later,
after we have plowed back all earnings along with much blood,
sweat and tears, the book value produced will buy about the same
half ounce. A similar comparison could be drawn with Middle
Eastern oil. The rub has been that government has been
exceptionally able in printing money and creating promises, but
is unable to print gold or create oil.

We intend to continue to do as well as we can in managing
the internal affairs of the business. But you should understand
that external conditions affecting the stability of currency may
very well be the most important factor in determining whether
there are any real rewards from your investment in Berkshire
Hathaway.

In the last BH letter (2010) book value had increased to $95,453 or the equivalent of around 54 ounce of gold. What if the old guy is not having a go at gold but just trying to say something he's found to be important?

Lifted from his article the graphic on growth of $100 since 1965 shows T-bills become $1336, gold $4455 and S&P 6072. I think histories verdict, for whatever that is worth, is that hard assets flog currency denominated investments but equities (which have the ability of utilising brain power)come out on top over the long run and that to me seems a logical expectation for the future.


What is gold worth? When put in terms of Buffets group A and B then it seems ridiculously overpriced. But should it be valued that way? Maybe its value is more akin to that of an alternative currency where its ‘value to you’ is whatever ‘somebody else thinks it is worth to them’ (double belief). Under such a valuation paradigm what happens if gold stops rising? Gold’s valuation under an alternative currency scenario is now predicated on a rising trend but nothing rises for ever. With nothing but a ‘double belief’ valuation peg, gold is pretty much unbounded as to where its price may go.

For me gold just doesn’t fall within my approach to investing, which is to swap today’s purchasing power for a stream of future purchasing power generated by the asset itself. Selling to me is only about commuting the future flow of purchasing power if I “choose” too. The purchase decision should never be reliant on a future selling price. Purchasing power can only be realised from gold by selling it – that puts it outside my scope. If gold’s price goes to the moon I will just have to be content in knowing that at least I never have to buy any because I have no need for it. Prices for food, energy, clothing shelter etc.... that’s another story. I would feel vulnerable without hedging against their rising prices which I get through share ownership.

 

[sinner]

The thunders pretty quite around here.

This is from the 1979 Berkshire Hathaway letter.



In the last BH letter (2010) book value had increased to $95,453 or the equivalent of around 54 ounce of gold. What if the old guy is not having a go at gold but just trying to say something he's found to be important?

Lifted from his article the graphic on growth of $100 since 1965 shows T-bills become $1336, gold $4455 and S&P 6072. I think histories verdict, for whatever that is worth, is that hard assets flog currency denominated investments but equities (which have the ability of utilising brain power)come out on top over the long run and that to me seems a logical expectation for the future.


What is gold worth? When put in terms of Buffets group A and B then it seems ridiculously overpriced. But should it be valued that way? Maybe its value is more akin to that of an alternative currency where its ‘value to you’ is whatever ‘somebody else thinks it is worth to them’ (double belief). Under such a valuation paradigm what happens if gold stops rising? Gold’s valuation under an alternative currency scenario is now predicated on a rising trend but nothing rises for ever. With nothing but a ‘double belief’ valuation peg, gold is pretty much unbounded as to where its price may go.

For me gold just doesn’t fall within my approach to investing, which is to swap today’s purchasing power for a stream of future purchasing power generated by the asset itself. Selling to me is only about commuting the future flow of purchasing power if I “choose” too. The purchase decision should never be reliant on a future selling price. Purchasing power can only be realised from gold by selling it – that puts it outside my scope. If gold’s price goes to the moon I will just have to be content in knowing that at least I never have to buy any because I have no need for it. Prices for food, energy, clothing shelter etc.... that’s another story. I would feel vulnerable without hedging against their rising prices which I get through share ownership.

Hi craft,

Thanks for your reply. I think your statement about "logical future expectations" is logically flawed because you apply very linear thought process to a nonlinear issue and a very good example of recency bias.

I agree with your comments about unbounded valuation for gold, as much was said in the FOFOA article, however strongly disagree with what you think golds value is predicated on. You say its value is predicated on a rising trend, rather I feel its value is predicated on exactly what you said before about unbounded valuation.

As for your final paragraph, it clearly gives away that you did not read the article, or chose to ignore all its most salient points. A real shame, since I would've liked to continue the discussion.

 

[craft]

Hi craft,

Thanks for your reply. I think your statement about "logical future expectations" is logically flawed because you apply very linear thought process to a nonlinear issue and a very good example of recency bias.

I'm not sure about the recency bias - the comparison I referred to was since 1965. The basis of my logic is that it’s only through utilising human intellect to improve productivity do we increase humanities wealth. Holding gold does not release human intellect - the most gold can do is reflect the wealth creation - however it cannot reflect the wealth creation to a full extent otherwise nobody would commit funds to commercial endeavours - they would just buy gold. I hold the same logical basis for favouring shares over real estate. There is however no argument from me that gold and real estate can outperform over shorter or even medium term time frames but not the long term.

I agree with your comments about unbounded valuation for gold, as much was said in the FOFOA article, however strongly disagree with what you think golds value is predicated on. You say its value is predicated on a rising trend, rather I feel its value is predicated on exactly what you said before about unbounded valuation.

If a person’s justification in holding gold is that it protects their purchasing power – how do they react in periods when gold is trending down and not protecting their purchasing power over a given persons timeframe. Without a cash flow peg, gold has as much down side as up.

As for your final paragraph, it clearly gives away that you did not read the article, or chose to ignore all its most salient points. A real shame, since I would've liked to continue the discussion.

I did read the article. But it has not changed my approach. I feel comfortable in being exposed to what I believe is the highest order asset class for wealth creation – I like the hedging that producing assets give me against things I will actually consume over my life time. I like that the assets I hold will generate the cash flow that justifies holding them, which makes selling, an option rather than a necessity - the ultimate defence against depressed markets. What is your protection against a depressed gold market?

I have given my response to the debate, which is just one perspective for people to consider - that’s it. Not everybody is going to approach the markets the same way. If a person’s approach was to follow price trends – I would definitely be interested in gold because it is unbounded by a valuation peg. Equally I would also be stepping aside very quickly if the trend since 2001 breaks.

 

[craft]

I await a thunderous discussion.

Hmmm

 

[sinner]

There is however no argument from me that gold and real estate can outperform over shorter or even medium term time frames but not the long term.

Ok so this is an argument of outperformance, which I am not looking for.

If a person’s justification in holding gold is that it protects their purchasing power – how do they react in periods when gold is trending down and not protecting their purchasing power over a given persons timeframe. Without a cash flow peg, gold has as much down side as up.

This is because you view the equation (like most) in reverse to me. I view gold as bidding for dollars, not dollars bidding for gold. That means my purchasing power (although I prefer the term savings) is protected in volume of gold. My total volume of savings (in gold) can only go down if I choose to sell it. The volume of gold holds no counterparty risk or issues regarding dilution. It does not degrade or change. As opposed to bank accounts, bonds, stocks and even real-estate.

What is your protection against a depressed gold market?

I hold no leverage in gold so require no 'protection'. My safety comes in the form of gold purchased with excess productive capacity. i.e. only requires to be sold if my personal consumption exceeds production for > 12 months. Nor do I view the gold market as "depressed" or "buoyant", it simply is. That means as long as I am productive to a greater extent than my consumption, I am usually always buying gold (I may occasionally defer purchase in the short term to decrease premiums). Take a look at the ECB Quarterly ConFinStat to see how this works.

I have given my response to the debate, which is just one perspective for people to consider - that’s it. Not everybody is going to approach the markets the same way. If a person’s approach was to follow price trends – I would definitely be interested in gold because it is unbounded by a valuation peg. Equally I would also be stepping aside very quickly if the trend since 2001 breaks.

Thanks for your thoughts craft, definitely appreciated. Nobody else had anything else to say!

 

[Glen48]

PM's are on the rise because we have a depression arriving over the next few/several years so people change their ideas and look for protection just like a farmer would if he knew a drought was coming he would store more water .
Once the drought was washed away he would go back to his "normal" way of life.
Sure store Gold has it draw back like others know you have some and therefor a target but every thing in life is a risk.

Buy on the dips and keep buying for many years to come.