
Warren Buffett: Why stocks beat gold and bonds - DVassallo
http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/?iid=HP_LN
======
Aloisius
Warren Buffet is a value investor. He buys stocks that he sees as
fundamentally undervalued during a bear market and sells them when they are
overpriced later.

If you try to value gold objectively (its industrial and possibly jewelry
use), its price should be significantly lower than what it is today.
Speculation and paranoia have driven its price to amazing heights. A value
investor can't touch gold with a 10 foot pole.

I know Hacker News has its share of gold bugs and libertarian survivalists
preparing for the fall of the US government. My only recommendation for you
all is to remember to leave a map to your buried gold in case you die
unexpectedly.

For those who don't think the fall of civilization will come within their
lifetime (which I hope is the majority of you), trying to match the market
with a heavy diversification of stocks/ETFs and bonds (notably US government
bonds), a long time horizon and a yearly re-balancing is probably a better
bet.

~~~
shingen
Gold is priced in dollars. If the dollar loses real value, gold goes up. It's
the same reason oil is $100, its baseline price is getting set ever higher,
because it's priced in dollars. Price oil in silver or gold and you'll see
that oil hasn't gone up in price, the dollar has gone down.

It's not paranoia or speculation primarily driving the price increase, but the
objective destruction of value represented in what a dollar can buy today
versus, say, 12 years ago.

~~~
Aloisius
I know you're heavily invested in gold, but what you say is simply not true.
The Gold-Oil ratio has fluctuated from upwards of 36:1 to 1:8 over the past 40
years.

Further, if it were true then in 2009 when oil plunged from $140 to $50 a
barrel, the value of the dollar should have shot up significantly. When gold
dropped 20% last year, there wasn't a corresponding increase in the purchasing
power of my dollar.

You only have to look as far as the sleazy companies selling gold to old
people on tv and charging 20-30% markups to know that speculation is driving
this market.

~~~
shingen
I own zero gold. I'm being objective about what it does, and does not do. It's
a store of value, that's it.

I'm heavily invested in my self. I own a business.

Which is also why in one of my posts, I said the best investment you can ever
make is: you.

Tracking lines on oil and gold requires that you do so over an actual
duration, not on select spot prices. Over time, oil and gold have tracked each
other extraordinarily well.

Ultimately the point is really simple: check out a graph on oil and gold
prices since 1970. To the moon. Why? They're priced in junk dollars.

~~~
Aloisius
If you open up a graph of the ratio between gold oz and barrels of oil over
the last 40 years, you will not see anything resembling a straight line. They
don't track each other. At all. Not even a little bit.

There are literally thousands of charts and graphs that you could find a
reasonable correlation with gold, but oil is not one of them.

I don't know where you got the idea that they tracked each other, but it is
simply wrong. Gold does not track oil, CPI-U does include food and energy and
inflation is not anywhere near where you think it is.

------
ef4
His basic point is almost a tautology. Yes, it's great to own productive
assets. The real trick is predicting which ones will really stay productive
over the long term. Just buying a broad index is often not a winning strategy
when you factor in the taxes, inflation, and survivor bias. Certainly Buffet
hasn't just bought a broad index -- he makes highly targeted investments.

And he glosses over a basic point that I've seen many commenters miss. An
asset like gold behaves differently under bubble conditions than an asset like
a tech stock, tulip, or house. The production of those things is price
elastic, and rising prices cause rising production that ultimately crashes the
bubble.

But expanding the supply of gold available for trade by more than a couple
percent a year simply isn't feasible. This is precisely why markets have
repeatedly chosen it as a form of money.

Of course this means the market for gold is driven purely by demand sentiment,
and of course demand could crash. But this is true of every currency -- it's
only valuable because it's valuable.

~~~
jtbigwoo
_An asset like gold behaves differently under bubble conditions than an asset
like a tech stock, tulip, or house. The production of those things is price
elastic, and rising prices cause rising production that ultimately crashes the
bubble._

The number of new home sales at the top of the bubble was about 1.4
million/year vs. existing housing stock of over 70 million. That's less than a
2% increase per year, not counting the thousands of home that are demolished
each year. Vast new production isn't required for a bubble.

------
klochner
He omits the only valid reason any non-speculator would own gold - it holds
it's value through times of political turmoil - holds it's value over
_millenia_ rather than decades or centuries.

A coup d'etat may result in seizure of private companies, rendering your stock
worthless, but not touching the value of gold.

It would be speculating to put all your assets into gold, but a small amount
is like an insurance policy.

relevant: [http://www.csmonitor.com/World/Americas/2011/1105/Hugo-
Chave...](http://www.csmonitor.com/World/Americas/2011/1105/Hugo-Chavez-looks-
to-take-Venezuela-s-private-Los-Roques-paradise-public)

    
    
        Government expropriation of private industry has been a
        key policy of Chávez's regime.
    
        More than 450 companies have been expropriated this year 
        alone. ExxonMobil, which had its assets seized in 2007, is 
        still fighting the Venezuelan government for $7 billion in 
        compensation it believes it is owed.

~~~
mikeash
An unstable government could just as easily seize your gold.

What investor cares about millennia? Centuries is already too much, unless
you're vastly more concerned about your great great great grandchildren than
most people. 100 years is probably the absolute largest possible upper limit
for a real investor to care about, and typically it's much less still.

~~~
dmm
I think he was talking about a small amount of gold. Twenty-thousand dollars
worth could fit in your hand and easily be smuggled in clothes, luggage, etc.
That's pretty handy if you had the flee the country from nazis(or whatever)
that have stolen all of your other assets.

Admittedly that's a pretty unlikely scenario.

~~~
cube13
It's even more unlikely because you then have to find a buyer that's willing
to pay market price for the gold wherever you end up at. You'll be reduced to
selling it for whatever people are willing to pay.

~~~
_delirium
In the past it's been mainly useful if you can flee from a region in turmoil
to one with more stable conditions. For example, my grandfather fled Turkey
for Greece in the late 1910s (<http://en.wikipedia.org/wiki/Greek_genocide>),
taking some gold with him that he was then able to sell in Greece, using the
money to help resettle.

------
ericdykstra
Same conclusion from a slightly different angle: You trade risk for expected
payout. Imagine each of these scenarios is like flipping coins with different
values attached. At the end of the year, you flip one coin:

\- Bonds: Heads, you gain 1%. Tails, you gain 1%. If it lands on it's side,
you lose everything (government default)

\- Stocks: Heads, you gain 15%. Tails, you lose 10%. A lot more risk here, but
the expected value of flipping the coin is higher.

Some people would rather flip the bonds coin, some would rather flip the
stocks coin, and it depends on the individuals' risk tolerance.

Gold doesn't fit the model, because buying gold is speculation rather than an
investment.

~~~
Wilduck
I think this is miss-representing Buffett's position here. First off, he
explicitly states that the riskiness of an asset should not be measured by its
volatility:

> Assets can fluctuate greatly in price and not be risky as long as they are
> reasonably certain to deliver increased purchasing power over their holding
> period. And as we will see, a nonfluctuating asset can be laden with risk.

He goes on to describe what sorts of investments he thinks are worthwhile.
Namely investments in assets that will continue to be productive in the long
term.

> Investment in productive assets, whether businesses, farms, or real estate.
> Ideally, these assets should have the ability in inflationary times to
> deliver output that will retain its purchasing-power value while requiring a
> minimum of new capital investment.

Again, this isn't framed in terms of risk. Probably because with a diversified
portfolio the risk is not at all analogous to flipping a coin (there is
obviously still risk, but it's not that simple). Instead, it's framed as
current versus future consumption.

As for gold, I don't think he frames it in terms of speculation versus
investment at all. Buffett recognizes that gold will probably continue to hold
value. Instead, he decides to frame the question in terms of whether gold is a
productive asset. It isn't. It will just sit there.

> You can fondle the cube, but it will not respond.

------
tnuc
Warren Buffet once wrote about gold...

It gets dug out of the ground in Africa, or someplace. 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.

~~~
jrockway
Gold has utility: it easily forms a plating on other metals, and conducts
electricity even when continuously exposed to air. This is not true of many
other metals, hence the popularity of gold-plated electronic interconnects.

~~~
brown9-2
But is that utility that you mention the reason why people bury it again and
pay people to stand around guarding it?

Gold may have some utility and practical applications but that does not seem
to account for all of it's perceived value.

------
Cushman
Imagine if gold were a company.

Friend: "Hey man, you gotta get in on this— this stock has gone up 30% in the
last year! Nowhere to go but up!"

You: "Wow, that's amazing! What does it do?"

Friend: "Um... it doesn't corrode?"

~~~
smokeyj
Imagine if the USD were a company.

Friend: "Hey man, you gotta get in on this— this stock has gone down 30% in
the last year! Nowhere to go but down!"

~~~
william42
Hint: the value of USD isn't as an investment. In fact, if the value of USD
goes up, that makes it _less_ useful, because the point of having money is to
spend it. For example, one of the many reasons of the utter trainwreck of
Bitcoin is the fact that more people were holding it as speculation than
actually using it to purchase anything.

And it's only 3% in the last year if you aren't trying to compare it to
something mid-bubble. The USD is totally going down with respect to tech
stocks, guys!

~~~
smokeyj
Currency markets exist. USD is an asset that can be traded. Holding USD is an
investment -- although, not necessarily voluntary. I don't know why you're
comparing gold to a baby p2p app with microscopic trade volume. That just
seems odd. Because they both experience deflation? In that case, all inflation
goes the way of Zimbabwe and even more worthless than gold.

~~~
william42
Currency markets exist, but most currency trading is a lot more short-term.

Holding USD is rarely an investment. You put money in your checking account(as
opposed to a savings account/CD, which is an investment in the bank) because
you expect to spend it(you know, what money is _for_?) soon. Only banks hold
large amounts of USD and they almost immediately loan it out.

And you're right, it's unfair to compare gold to Bitcoin. There are people
actually using Bitcoin as a currency, whereas gold is almost exclusively
exchanged for actual currencies, which are then exchanged for goods and
services.

And the failure of the Zim dollar is the reason they recently returned to the
gold standard. Oh wait, no, they switched to USD.

------
Schultzy
Mr. Buffett, like a lot of people, mischaracterizes gold as an investment. It
is not. Gold is a store of wealth, not a tool realizing future gains (although
that may happen). It is disingenuous to compare gold to stocks, or even to
farmland as Buffett does. When you buy land, it doesn't miraculously produce
crops (wealth) for you, you must input labor and resources (money) first.

I know this is nothing new, but investing in yourself through education is far
and away the best investment out there. Governments, thieves, natural
disasters and who knows what else can seize or destroy your stocks, bonds,
gold, and land, but they can never touch your knowledge and experience. Even
if you loose all of your possessions, you can use what you know to reacquire
them. If the goal is "preserve AND grow" wealth, educating yourself is the
best investment.

~~~
zecho
The labor part is his whole point. Gold has little to no utility ("...some
industrial and decorative utility"), but land can be used to build more wealth
("A century from now the 400 million acres of farmland will have produced
staggering amounts of corn, wheat, cotton, and other crops").

He absolutely prefers actual production over mere investment in trends. "More
succinctly, investing is forgoing consumption now in order to have the ability
to consume more at a later date." This whole philosophy is at the heart of
nearly all of his letters to investors and other writings.

------
parfe
If you buy 16 ounces of gold then you have a pile of metal. 5, 10, 20 or 50
years from now it'll still be a one pound pile of metal. Bonds essentially
offer the same deal, only you trade a pile of money now for a slightly larger
pile of money in the future.

Investing in stocks however buys a piece of a growing entity. You buy stock
now and the company buys a tractor, a truck, a robotic assembly line,
researches some new polymer, hires staff, invests in its own growth and
actually produces goods. As time goes on the company is always trading in
current dollars.

Of course there is risk, but If I buy gold now I'm only ever going to own that
much gold in the future and the price is entirely based on some other gold-
buyer willing to buy a hunk of metal to sit on himself.

Buffet says it better right in the article though which I think people here
failed to address. _"Our country's businesses will continue to efficiently
deliver goods and services wanted by our citizens. Metaphorically, these
commercial "cows" will live for centuries and give ever greater quantities of
"milk" to boot. Their value will be determined not by the medium of exchange
but rather by their capacity to deliver milk."_

~~~
saalweachter
Technically you'll have 1.33 pounds of metal :-)

(Precious metals are typically measured in Troy ounces; there are 12 Troy
ounces to the Troy pound.)

~~~
parfe
Technically, I could still buy 16oz of gold and have a pound... So I
officially declare all my metaphorical gold is measured in international
avoirdupois ounces.

Which I learned about thanks to Wiki University.

Thanks.

------
chernevik
Disagreeing with Buffett is an express ticket to Looking Stupid. But.

As Buffett notes, gold demand is an index of fear. And yes, generally returns
on gold reflect the extent of fear. Were this the only return case, the whole
thing would be subject to tautological collapse.

But it's not the only return case. Sometimes fears come true. Governments
debase or revalue currencies, regimes collapse entirely, equity assets are
appropriated. (Anyone care to guess what happens if foreign investor interests
in the Chinese stock market collide seriously with vital state interests?) In
these edge cases, gold is one of the few assets that carries value across the
transition.

To which comes the reply, if the U.S. government falls you'll have worse
problems than asset preservation. Certainly true. But when those problems get
resolved, asset preservation will work its way back up the priorities.

It strikes me as lousy investment vehicle -- but I think it's a mistake to
dismiss its political and economic importance entirely because it doesn't make
sense in our particular context. The whole point of its importance is its
commentary on that context.

------
JoyxBen
He says: 'Whether the currency a century from now is based on gold, seashells,
shark teeth, or a piece of paper (as today), people will be willing to
exchange a couple of minutes of their daily labor for a Coca-Cola or some
See's peanut brittle ... Our country's businesses will continue to efficiently
deliver goods and services wanted by our citizens. Metaphorically, these
commercial "cows" will live for centuries and give ever greater quantities of
"milk" to boot.'

But how many companies have ever survived for centuries?

Yes, centuries from now there still will be companies producing goods and
services, but they are highly unlikely to be the same companies you put your
money in.

E.g:

'The average lifespan of a company listed in the S&P 500 index of leading US
companies has decreased by more than 50 years in the last century, from 67
years in the 1920s to just 15 years today, according to Professor Richard
Foster from Yale University.'

'Professor Foster estimates that by 2020, more than three-quarters of the S&P
500 will be companies that we have not heard of yet.'

<http://www.bbc.co.uk/news/business-16611040>

------
nonsequ
I don't think that Buffett is saying that stocks, at any given point in time,
will deliver you better returns over a given time period than gold or bonds.
He quite clearly notes that there are times when bonds are beaten up and
they'll offer a great return. Buffett, being a virtuoso, variously reaps
returns from derivative contracts, insuring sweepstakes prizes, and solar
farms. He once bought a boatload of silver and tried to corner the market. He
won't argue with you that with all of these there's a right time.

That's because all of these asset classes are subject to 'animal spirits.'
Stocks went through the tech bubble. At various times bond yields have been
too low when judged against the real risk that you do not get your principal
back in full. Bond yields are pretty darn low right now. Gold may seem
invincible now and it may seem that the world is only going to continue
falling apart and Helicopter Ben is only going to keep running the presses,
but don't you remember a time when stocks did nothing but go up? Or when
people thought that house prices would never go backward?

All of these asset classes are also subject to the 'invisible tax' of
inflation. As the money supply increases, all currency is devalued and
everything that's denominated purely in currency loses value as well.

To preserve and grow wealth, you must first beat inflation. Stack the assets
up against each other on these merits and I think that's where his logic lies.
Let's remove 'animal spirits' for now. Look at these asset classes
dispassionately for what they represent. Ignore prices, what they've done in
the past, where they are now.

Bonds are contracts for loaning currency. You as the lender demand repayment
of your principal and interest payments concordant with the risks you take
that the money does not come back to you. Most bonds as structured do not
protect you from inflation unless your nominal payout is explicitly pegged in
the contract (as with TIPS). You pay today's currency for a fixed amount of
tomorrow's currency and if that currency is worth less (as it probably will
be) you're out of luck.

Gold is a real good. It's a particularly nice real good in that it's malleable
and somewhat plentiful but both difficult to destroy and difficult to make
more of. Oh and it's shiny. Everybody agrees that gold is an excellent real
good in that way. Those factors, particularly that it's difficult to make more
of, protect you from inflation. The real value should stay the same so the
price of gold increases as inflation brings currency down around it. Gold
beats inflation for sure (except maybe for the bit of mining and new
discoveries that get done).

Stocks represent ownership in companies. A company is a group of people
operating capital assembled to provide a good or service to others in exchange
for value commensurate to the good or service tendered. A good company can
protect you when inflation attacks by raising the prices of its goods or
services so that it receives the same value as it did before. The well-known
example is a candy bar that costs a dollar today cost a nickel in the 1950s. A
great company can grow over time, providing more goods and services to the
world for more value. Ownership in a good company is an opportunity to both
protect against and even beat inflation. That is the key and that is why over
time it is a better idea to own stocks than gold. Here's something of a
common-sense test: name a family fortune and you'll usually find a company
behind it. Now name me a gold-hoarder in the Forbes 400.

Warren glosses over the bad here, that you could buy a stock representing
ownership in a poorly managed or even fraudulent company. You could buy a
chunk of fool's gold, but you wouldn't be a fool for long. People held onto
Enron stock for ten years after Fastow started his shenanigans.

Certainly the bad or fraudulent companies detract from stock performance in
the aggregate. But a major index does a pretty good job of protecting you
against this precisely because of survivorship bias. A company does not become
one of the top 500 largest in the US by being poorly run or providing no value
to its customers. A few frauds make it but there's so much scrutiny at the
top, they don't (or shouldn't) last long. The S&P 500 is a pretty good proxy
for the creme de la creme of businesses and that's why it's such a successful
measure. Owning it also offers you the opportunity to grow your wealth with
the expanding real value of the economy, beyond the level of inflation.

Now if we turn back on the animal spirits, timing matters. Buffet knows this.
He's one of the best market-timers out there. Buffett would not have written
this article in 1999 even if the precepts were all the same because he knew
that it was a bad time to buy stocks and he would get blamed for the people
that misunderstood his advice. He wouldn't write this article in 2008 either
because he knew then that bonds were actually a great deal (as he points out).
He's publishing this article now (even though it's somewhat of a timeless
truth) because he thinks stocks are pretty cheap and the alternatives are
terrible.

~~~
Aloisius
_As the money supply increases, all currency is devalued and everything that's
denominated purely in currency loses value as well._

This is a gross oversimplification. The monetary supply can increase without
inflationary effects as long as there is a corresponding increase in the
production of value in an economy.

~~~
reedlaw
Like computers becoming cheaper and cheaper while the prices of other goods
increase? That's just another form of inflation because the computers would be
that much cheaper if it weren't for an increase in the monetary supply.

~~~
Symmetry
Erm, lets make this simpler. Lets say that in year 10 the economy produces
exactly 100 apples and nothing else. And lets say that in the year 20 the
economy produces 200 apples and nothing else. If apples were selling at $1 in
year 10, then we would expect apples to sell for $.50 in year 20 with a
constant supply of money[1]. We call this decrease in price deflation. The
money supply does double, we would expect the apples to still sell for $1 and
we would call this price stability. If the money supply were quadrupled then
each apple will now cost $2, and we'll have had inflation.

[1]Well, in the real world in the short term people tend to be upset by the
idea of the amount of money they receive for a good or product decreasing, so
prices and wages tend not to decrease as fast as you might expect in a
theoretical perfectly efficient market. This is called nominal downwards price
rigidity by economists and nominal loss aversion by psychologists. This is the
simplest of the mechanisms by which inflation and deflation can effect the
state of the real economy.

------
vimalg2
Since Indians are notorious Gold bugs historically, this piece by an Indian
Investment Blogger is relevant and illustrates several popular misconceptions
with data. Oh, and Graphs. [http://www.jagoinvestor.com/2012/01/gold-price-
movements-ana...](http://www.jagoinvestor.com/2012/01/gold-price-movements-
analysis.html)

------
lmkg
SO I was recently trying to figure out why Bitcoins could be considered a
rational investment (sorry to bring up that dead horse again =P). Much to my
surprise, I realized that reasons for investing in them are much the same as
the reasons for investing in gold.

    
    
      * Relatively stable, predictable supply over time
      * Not controlled or regulated by any institution or central authority (government or otherwise)
      * Value determined entirely by market
      * Will not decay or collapse: you can bury it for 1,000 years, dig it up, and it will be valid and unchanged
      * Value not tied to the utility of an underlying asset[1]
    

For both gold and bitcoins, that last bullet point is both the cause of all
their advantages, and the source of all their criticisms. By all rational
analysis, bitcoins should be valueless and gold should be much cheaper. They
don't do anything but sit there, unchanged. However, this resilience against
outside factors is what makes them eligible as an "apocalypse-proof"
investment. In order to fully attain this status, they merely need everyone to
agree on their status as such, which is circular but nonetheless appears to
have happened.

The lack of underlying utility is the criticism that Warren Buffet makes of
gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow,
think "this is stupid," and stop spending so much money on gold. Bitcoin is
100% speculative. People will need food and electricity tomorrow, but they
won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has
remained and in fact increased over time.

For my part, I find both gold and bitcoins to be irrational investments and I
am annoyed that they cost as much as they do. Nonetheless, other people's
actions may make them rational investments.

[1] Technically, there is a physical asset underlying gold with some utility,
but I believe its market value is primarily determined by its investment value
and not the underlying asset.

~~~
javert
_In order to fully attain this status, they merely need everyone to agree on
their status as such, which is circular but nonetheless appears to have
happened._

I'm not so sure that works.

With gold, it was _not_ the case that everyone just "agreed to agree" that it
was valuable.

Rather, gold was valued independently of its "investment value" due to its use
as a status symbol/decoration/jewelry.

Likewise, because of that, there's no risk of everyone suddenly "disagreeing"
that it's valuable, causing a huge collapse.

With bitcoin, it's unclear to me that there is a way to either bootstrap this
"agreement" in the first place, or to sustain it.

~~~
kyrsey
Glass also has decorative value. There's no easily imaginable risk of everyone
suddenly deciding that it has NO decorative value.

So what? That's not the relevant risk. The relevant risk is that whatever you
are using as a currency will DECREASE in value. Say, from the level of
something highly valued as a medium of exchange accepted everywhere, to the
level of a mere decoration. Or from a peak value where you bought in big
during a speculative bubble, to a lower value where (yes) it's still worth
something, but worth less than if you had kept it in treasury bonds or an
index fund or a farm.

------
outside1234
This is a great article. I wish he had explained three things in more detail:

1) that you can only count on this over longer timeframes (15+ years) 2) his
argument assumes an inflationary environments (versus a deflationary
environment like Japan and Europe) 3) if you don't have the skills to read a
Exxon Mobile or Coca Cola income/balance sheets once a quarter and find it fun
you should invest in index ETFs.

These three things are why average investors should have a mix of stock and
bond index funds in their portfolio that is based on their timeline.

Shameless plug: I'm bootstrapping a startup to help average investors manage
their portfolios. If you are interested in getting started with or managing an
existing index oriented asset allocation investment plan, I'd love to help you
at <https://azul.io> (free of charge to folks signing up before I get Stripe
integrated)

------
ww520
Buffett is great at picking stocks. The problem with his statement is that he
is a professional stock investor but we mere mortals are not. We have our busy
lives other than watching the market. For us, the correct strategy is to do
balanced portfolio with 50/50 :: stock/bond, or some other ratio.

~~~
iy56
Paying someone like him a fee to choose stocks for you seems like a much
better strategy to me.

~~~
yannickt
The challenge is identifying "someone like him" _before the fact_. But if you
could do that, then you would know why he's been so successful and you'd be
able to do it all by yourself. Most funds do not beat the market in the long
term (> 10 years) after costs, and for the same asset allocation, someone who
just invests in the market (e.g. through low-cost index funds) will do much
better than the average professional manager.

~~~
iy56
Investing money produces measurable results. It is possibly to verify that
someone is a successful investor without knowing why he is successful.

~~~
makomk
It is completely useless to verify that someone's investment choices were
successful in the past without knowing why. For example, there are enough
hedge funds out there that there will always be a few that outperform the
market just through sheer luck, and there's no way tell the difference between
a fund which has succeeded in the past through sheer luck and one that's
actually well-managed. In fact, I seem to recall there's decent statistical
evidence that nearly all managed investment funds with a track record of
success were successful in the past solely through chance.

Edited: In fact, Warren Buffett has an interesting bet outstanding related to
this, see <http://longbets.org/362/>

~~~
iy56
It's not completely useful, nor is it completely useless. As long as it is
possible to be a "good" investor, in the sense of making lots of money, it can
still be _somewhat_ useful. If you continue to bet on people who made
successful investments in the past, you might get burned by the people who
merely got lucky, and you will make money when the person really was a smart
investor. Past performance thing is not a convincing argument against this. A
valid argument would be that the ratio of those groups is not favorable enough
to overcome the management fee. I'd be interested to see if the Buffet bet you
mention is related to this, but my work filter blocks that site.

------
RockyMcNuts
I ran some numbers, and gold seemed to add value to most portfolios over the
last 83 years, with modest real return and low correlation with other assets.
(Of course, it was legally problematic to own in large quantity in the US for
a large part of that period, although you could own jewelry etc.)

The last 30 years of disinflation, stable growth were not a good time to own
gold.

[http://blog.streeteye.com/blog/2012/01/gold-as-part-of-
long-...](http://blog.streeteye.com/blog/2012/01/gold-as-part-of-long-run-
asset-allocation/)

[http://blog.streeteye.com/blog/2012/01/are-long-term-
asset-c...](http://blog.streeteye.com/blog/2012/01/are-long-term-asset-class-
relationships-stable/)

------
seanalltogether
"Can you imagine an investor with $9.6 trillion selecting pile A over pile B?"

No, but most people aren't investors, they're just people with a small amount
of money buying pieces of paper from each other to gamble over which company
is most attractive.

------
vimalg2
Summary: Gold is Insurance, not Investment(especially after inflation kicks
in).

It's probably a good idea to have some % asset allocation for this class of
holdings, for the various Doomsday scenarios.

That... and a cellar stocked with lots of tinned food.

------
brazzy
Nitpick: there's one clearly false statement Buffet makes:

 _The second major category of investments involves assets that will never
produce anything, [...] Tulips, of all things, briefly became a favorite of
such buyers in the 17th century._

Tulips actually produce something - more tulips. It's actually quite possible
that the bulb of a rare and especially pretty tulip variety could be a sound
investment for someone intending to grow tulips. And that's how the Dutch
tulip mania started out (though it then did proceed to truly bizarre
excesses).

------
mkramlich
Any discussion involving gold unfortunately brings out the loons.

------
jpdoctor
The fact that Warren is on the hook for several billion dollars of S&P puts is
mentioned nowhere in the article.

When O When are reporters going to understand conflict-of-interest?

~~~
hodder
Do you honestly believe that Warren is trying to deceive you into investing in
productive assets rather than a shiny metal because he wants to manipulate the
market?

~~~
reedlaw
I believe that his speculation argument against gold holds for the stock
market as well. Investors create feedback loops when they buy stocks that then
creates even more demand. Buffet believes in the S&P and so he will naturally
encourage others to do so.

~~~
kyrsey
The value of anything can be propped up by speculation, what varies is the
value which can be maintained without speculation (e.g., in cases where the
bubble bursts).

I think this is the use of discriminating among (A) resources reasonably
expected to decline in value, (B) resources expected to 'hold value' modulo
speculation, (C) resources expected to have ongoing returns with or without
speculation.

------
mutant
Lets listen to the jailer tell the inmates that shackles are better than
manacles.. _grabs popcorn_

------
kahawe
In the 90s everyone rushed the IT shares and then the dotcom bubble burst.

In the first decade of our new millennium, real estate and all sorts of weird
financial products somehow building on real estate were THE best way to invest
money because nothing can happen, you have a house standing right there,
right?? Then that bubble burst.

Now, you'd think people would have learned by now but no... sure as hell now
everyone rushes to buy gold and silver because "hey what could possibly
happen"??? Even one of my colleagues who has been burned both times on dotcom
shares and some shady real estate thingy in east-germany, no less, now
religiously swears by gold and silver because what could possibly happen?

People seem to really not be able to grasp that it is just another market.

~~~
rubashov
> everyone rushes

Who is rushing to buy gold? I'd be surprised if more than 1% of households
have meaningful gold exposure.

~~~
InclinedPlane
Look at this graph: [http://blog.thomsonreuters.com/wp-
content/uploads/2011/04/GL...](http://blog.thomsonreuters.com/wp-
content/uploads/2011/04/GLD_INF0411_SB.jpg)

Is that the sign of an investment that keeps growing in value steadily across
the ages or merely the sign of a speculative bubble about to burst? Hint: look
at the late 70s as well.

~~~
illumin8
Have you considered that the chart merely shows the value of gold in US
dollars, and that it could be, this time, that the US dollar is the
speculative bubble that has been bursting for some time now.

~~~
InclinedPlane
It has two lines, one is for prices adjusted for inflation (the blue line),
the other (the yellow line) is with absolute prices.

~~~
gsmaverick
Inflation rate doesn't properly reflect the change in the value of the US
dollar. A better line would be one adjusted for the growth in money supply.

~~~
Steko
Inflation is the proper measure. The chart might not say what you want it to
but that's not it's fault.

------
DannoHung
Man, you'll never be able to convince gold bugs it's a bad idea.

Shit's just too shiny.

------
shingen
He's wrong. Stocks do not beat gold once inflation outpaces the rate of
average market returns, which is exactly where we're at now.

Gold is up 87 fold over 90 years or so. There is no way to capture that kind
of return out of stocks, other than to buy one stock, Apple at the absolute
bottom, or buy Dell the day it IPO'd or other similar freak scenarios, and
then hold all the way through, and then sell at the absolute top. On a long
term duration, it becomes increasingly difficult to survive even modest
inflation and market changes (you have to constantly shift your investment
strategies for all sorts of reasons: age, family, economic conditions, and so
on). Few people are skilled enough to do that well.

With gold, you merely need to buy and hold - IF you believe the fiat currency
will continue to depreciate due to 'printing' (to pay for entitlements, to
devalue national debt, to fund deficits, and so on). There are very few things
you could leave for your grandchildren that will retain their value, real
estate and gold are two prime options.

If you had bought and held the stocks that make up the Dow over 60 or 70
years, you'd have gotten demolished because the Dow constantly shuffles its
index. That is to say, you can't look at the Dow from 70 years ago and compare
it to today, because the index is completely different, and the average
investor could only easily purchase index ETFs in the last 30 or so years.

In reality, the Dow is not at 13,000 today as we knew 13k to be back in
1998/99 during the huge stock market bubble. Inflation has eroded that nominal
value by at least half. The Dow is more likely at 5,000 to 6,500 depending on
what you believe real inflation has been over the past 14 years (not the Fed's
bogus CPI numbers).

The dollar has lost 97% of its value since the Fed came into existence.
There's no way you can outrun that unless you hit homeruns in the stock
market, which is what Buffett did, and which is exactly what your average
investor cannot do regularly. The majority of people that invest in the stock
market lose money. That's tracking since the late 1960s when the US went off
the gold standard and inflation skyrocketed (sending oil, gold, and nearly
everything radically higher).

Buffett hasn't made most of his wealth in the stock market anyway (nor that of
Berkshire). He has made it by using insurance company float cash to purchase
other high float companies, and then rolling that ball forward. Nearly all of
his big market gains peg to one period of time, the 1970s, when stocks were
once-in-a-generation cheap; his timing was brilliant, but it was an
exceedingly rare scenario.

~~~
gibybo
>Gold is up 87 fold over 90 years or so. There is no way to capture that kind
of return out of stocks, other than to buy one stock

$1 in gold 90 years ago: $87 today (by your number anyway)

$1 in a basket of stocks that were traded to match the DOW starting 90 years
ago: $174 today (from the article's numbers)

Keep in mind this includes the recent 5 year period where gold has shot up and
stocks have performed miserably. If we picked different dates, gold would be
even further behind.

~~~
shingen
The problem is you could have actually owned gold for 90 years. Average Joe
could have bought gold and held it.

You could not have owned the Dow index for 90 years and then left that to your
children or grandchildren.

Would you like to still be holding Polaroid or Kodak? Or perhaps just bought
and held the classic Dow index perpetual GM? You would have gotten wiped out
in the Dow shuffling. The Dow gets to drop something like GM at its
convenience, but if you had bought its stocks in a basket format (not an ETF),
you'd literally be holding worthless old GM shares, and a lot of other
worthless shares that they don't currently count in today's Dow numbers.

The Dow calculation is a theoretical, not an actual. 90 years ago only a very
savvy investor could have owned a basket of stocks to mirror and index exactly
and constantly traded in and out of the market. In 1920, an exceedingly small
% of people owned or had access to equity markets.

Buffet using even 1965 as the reference point is disingenuous because of those
reasons. His scenario is not a normal one: he used his father's brokerage firm
to commit his first market transactions back in his early days. How many Dow
tracking ETFs existed in 1965? How many people owned stocks in 1965? Today you
can open an account at Scottrade or wherever, and pay a mere $7 transaction
fee to buy stocks.

~~~
gibybo
The Dow doesn't get to drop GM after it goes bankrupt and then not count its
losses. The decline of GM hurt the Dow index just as much as it would have
hurt anyone else that bought and sold GM stock when the Dow index
added/dropped it.

It also represents an average of the market, so the fact that it was hard to
mirror it exactly is not particularly relevant. Mirroring it approximately, or
buying any other large basket of stocks, would have led to roughly the same
result.

While it's true that an investment in Gold was better than an investment in
USD, it wasn't better than common stock equities. You said the only way to
capture a return better than Gold was to buy a particular stock at IPO, but
that's just factually incorrect.

~~~
shingen
The Dow gets to replace GM with another growth vehicle of the modern era.
While you take a real beating on the shares, the Dow simply swaps in a new
stock (typically one with brighter prospects that can recharge the lost value
in the Dow).

You can't swap your dead GM shares for the shares in, say, John Deere when
it's added to the index. Your money is gone.

~~~
stouset
You, simply put, utterly fail to understand how indexes work.

------
spenrose
Buffet: "A century from now the 400 million acres of farmland will have
produced staggering amounts of corn, wheat, cotton, and other crops -- and
will continue to produce that valuable bounty, whatever the currency may be."

Buffet implicitly rejects global warming here, specifically the latest
projections on drought: [http://earlywarn.blogspot.com/2012/01/another-
terrifying-dro...](http://earlywarn.blogspot.com/2012/01/another-terrifying-
drought-paper.html) and others.

~~~
delinka
You seem to implicitly reject the human ability to adapt. We'll find a way to
adapt to the changing environment. Hell, we might even adapt our habits (ha!)
and allow the environment to correct itself.

Regardless of the plausibility of global warming, 400 million acres of
farmland will _still_ produce more value in crops than you could shake your
investment stick at.

~~~
spenrose
No, I read very smart people who try to analyze what it would take to adapt,
and they range from deeply concerned to terrified. Start here:

    
    
        http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/
    

or here:

    
    
        http://earlywarn.blogspot.com/

