Guest Post: What Warren Buffett Doesn’t Understand About Investing

Tyler Durden's picture

Submitted by Tim Price of Sovereign Man blog,

“Price is what you pay; value is what you get.”
– Warren Buffett

Warren Buffett’s aphorism has been rightly celebrated. But to be a true value investor, it helps to have values.

Courtesy of near-zero interest rates and global competitive currency debauchery, it is increasingly difficult to assess the value of anything, as denominated in units of anything else.

To put it another way, the business of investing rationally becomes problematic when a significant number of market participants are pursuing maximum nominal returns without a second thought as to the real (inflation-adjusted) value of those returns.

Hedge fund manager Kyle Bass alluded to this problem recently when he pointed out that the Zimbabwean stock market had been the last decade’s best performer, but that owning the entire index would only buy you three eggs.

It is not just Zimbabwe. Markets everywhere, in just about everything, have now decoupled not just from their underlying economies but from reality.

There are signs that Buffett himself has decoupled from the value investing philosophy that made him the world’s most successful investor. Berkshire Hathaway is paying almost 20 percent more than Heinz stock’s all-time high in the deal announced last week, and the equivalent of 21 times 2013 earnings as opposed to the 16 times multiple which is the last decade’s average.

Say what you like about the business, but Buffett has not bought it cheaply.

To us, the more intriguing aspect to Warren Buffett is that he gives every indication of not understanding money. As he says, gold “gets dug out of the ground in Africa, or some place. 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.”

Note that phrase: “It has no utility”. But utility, usefulness, purpose, value comes down to context. Context is everything. As Adam Fergusson bleakly put it in his moving account of Weimar Inflation in ‘When Money Dies’,

“In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.”

Buffett is chained to a rock of convention. He is hardwired to pursue money and he is very good at that pursuit. But he is not well programmed to consider the relative utility of money or its attributes as a lasting store of value.

Since 2000, the price of gold has outperformed the price of Berkshire Hathaway stock by over 300%. No particular surprise, then, that he should hate the stuff.

Likewise, many investors are losing faith in gold on the basis that its price in US dollars has recently declined. Context is everything. Express the price of gold in another currency, the Japanese Yen, and gold looks relatively buoyant:

yen What Warren Buffet doesnt understand about investing

So it comes down to what sort of money you want. And in an environment of competitive currency devaulation, it’s an important choice to make.

In making that decision, this helpful chart is used by fund managers at Stratton Street Capital to help assess sovereign credit quality. They suggest, and we believe, that it also has merit in assessing likely currency movements too.

nfa2 What Warren Buffet doesnt understand about investing

In a global deleveraging that is likely to persist for some years, the heavily indebted countries (the darker colors in the chart above) will desperately need to attract foreign capital to help service their heavy debt loads. And in order to do so, they will likely devalue their currencies.

But one currency it doesn’t highlight is gold. There is an increasingly disorderly currency war going on out there, and the advantage of gold is clear– they can’t print it, they can’t default on it, and there will always be demand for it.

Simply put, in the global currency wars, owning gold is like abandoning the battlefield altogether.

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MrX's picture

Warren Buffet doesn't realize that most savvy investors are solidly high as a kite.


NotApplicable's picture

If the author actually believes what he thinks that Buffett believes, well, then he doesn't understand anything about crony capitalism.


Fredo Corleone's picture

Indeed -- Buffett's "folksy mask" still has a salubrious effect upon some...

EnslavethechildrenforBen's picture

Buying Gold doesn't remove your ass from the battle ground. The only way to do that is remove the enemy completely.

SamuelMaverick's picture

Whenever Buffet or Soros speak to the public, whatever they say is only said to manage the actions of the sheeple in order to benefit themselves.

OutLookingIn's picture

Buffett; One of the biggest pigs at the bailout trough.

Freddie's picture

I loved when Ray Dalio of Bridgewater was asked roughly "Warren Buffett does not like gold and does not own anyway."   Ray sort of paused because he wanted to say that Warren Buffett is ****ing moron.  Instead he said "I think he is making a big mistake." 

Joe Davola's picture

True - the deal that is documented in the news is the smokescreen, somewhere buried in the minutae is the kicker that guarantees the Chiseler of Omaha a hefty profit.

TraderTimm's picture

I'll sum it up for you - Buffet is an old greying man that still believes in the elegance of railway travel.

Imagine that, someone aging and losing their connection with what is vital and interesting, most notably, keeping up with future trends and developments. I expect he'll get plastered with the rest of the fossils when the system grates to a halt.

kliguy38's picture

He's an operative for his bosses and he's the avuncular face of the game. He's like cyanide.....sweet smelling but deadly......taste at your own risk.

NotApplicable's picture

Got Tim Price fooled. Must be Simon's day off?

Midas's picture

Wouldn't it have been easier to say "Buffett don't know shit, since he doesn't own any Chilean farmground"?

LongBalls's picture

Gold is the only thing available to repair the banks balance sheets. A debt jubilee will not take place. If you had the power of money and credit creation what would you use as trade with other countries that have the same power. In the absence of oil this question becomes even more apparent. SDR's on gold reserves.

NotApplicable's picture

It won't be just gold, though. I see them taking every piece of debt-based, monetized garbage and rolling it all into one big ball, and making that the reserve base.

Otherwise it won't be FAIR. (Fuck All, Ignoring Reason)

Catflappo's picture

15 years ago I thought the guy was a bit of a legend.

Now I see him as nothing more than a guy with so much money that he can get the politicians (from either side of the house) to do whatever the hell he desires.   Part of a fucked up system so corrupted it is larceny on a mind-boggling, yet subliminal to most, scale.

C U Next Tuesday Warren.

Hedgetard55's picture

Correct. He is a cocksucking inside trading fucking criminal and bullshit artist. May he rot in hell.

Oldballplayer's picture

But admit it.  You would do the secretary that pays all of those taxes, wouldn't you?

Freddie's picture

The truth is Buffett has always been a scumbag.  His old man was a Republican senator of Nebraska.  He passes himself off as a small town hick.  The billionaires know the real money is inside deals in Washington DC. 

Oldrepublic's picture

His father Howard Buffet was a four term congressman from Nebraska

A libertarian who understood the value of gold as a foundation of freedom.

NidStyles's picture

He was about as Libertarian as Obama.

Silver_K-9's picture

Owning SIlver is like Going on Vacation... Cook Islands anyone!?

n.d.v.'s picture

"Berkshire Hathaway is paying almost 20 percent more than Heinz stock’s all-time high in the deal announced last week, and the equivalent of 21 times 2013 earnings as opposed to the 16 times multiple which is the last decade’s average."

Except, of course, that 2/3 of Buffett's investment are preferred shares paying a 9% dividend and not the common stock.

Freddie's picture

The Heinz purcahse is also probably payoff for John Kerry aka the second Mr. Heinz.  These criminals are sickening.  

km4's picture

Buffet's love of cheeseburgers with plenty of ketchup clouded his financial acumen in addtion to probable likihood of becoming a bit senile.

dscott8186's picture

In a global deleveraging that is likely to persist for some years, the heavily indebted countries (the darker colors in the chart above) will desperately need to attract foreign capital to help service their heavy debt loads. And in order to do so, they will likely devalue their currencies.


I'm confused, Brazil complained of being swamped with foreign money flooding into their economy.  Devaluing of your currency DOES NOT make anyone want to invest in your country since ALL hope of any return is gobbled up by the declining exchange rate.  

The only ones who want to devalue currencies are the idiots who are running up debts like a Latin Socialist.  You know, like Obama.

Hedgetard55's picture

Good point. How does devaluing your currency ATTRACT investment?

NidStyles's picture

It doesn't. What it does do is hold off all investors until the system goes bust so that they can come in with their foreign currencies to buy everything out and cartelize it even more so than the government did before it imploded on itself and became nothing more than an obvious gang of thugs rather than a somewhat sophisticated gang of thugs.

DosZap's picture

Good point. How does devaluing your currency ATTRACT investment?

It does in this sense, it makes your products cheaper compared to others,(bolstering trade/exports) and when people come to your country, their currency(if stronger) buys a lot more, and in Russians, and China buying up Miami R E.

Thats the whole point of devaluing, it allows other to invest at a cheaper cost,getting them more bang for their currency.

ilovefreedom's picture

Buffet is probably the largest individual status quo investor.  In order for his status quo assets and investments denominated in dollars to stay valuable, gold must stay supressed.  So while in normal economic activity he is correct that businesses have better utility then precious metals we are not currently in a normal economy.  Precious metals are an insurance policy against erosion of buying power.

Inflation behooves buffet in that he owns a large swath of dollar producing industries. It's only if the system collapses that gold is worth more than buffet's assets and he is "all-in" in that the mere public mention of gold as a having value would devalue his holdings which are denominated in fiat.

Ironicly his father believed in a collapse of the dollar and bought gold and a farm to survive the chaos.  He was only a few decades off, and for a man Warren supposedly loved and looked up to it is curious he chooses to ignore gold's utility for purposes other than which he is acustom.

Yen Cross's picture

 GE financial has Buffets(Hi Bypass) turbofans all over it!

francis_sawyer's picture

I'll leave Warren Buffett to LongSoupLine...

l1b3rty's picture

Buffet should pull a DotCom and buy bitcoin...

francis_sawyer's picture

Might as well... He's already decided to piss it all away on eugenics research... Can't be much different...

sessinpo's picture

Buffet should be renamed to buffer.


What I mean by that is that he has the luxury that most investors don't. He can make mistakes, he can move markets. Even when he makes mistakes, in most cases, he can ride out the situation until it is more favorable.


$50 billion has its advantages.

Yen Cross's picture

 Buffet the Fluffer. Fixed it for you...

world_debt_slave's picture

Ah, the oracle from Omaha, Buffet is not an investor but a modern day robber baron.

NidStyles's picture

Robber Barons were cronies. Gah, Doesn't anyone read Tom Woods?

econature's picture

Yes. I watch his lectures, too. He's fantastic.

Waterfallsparkles's picture

Buffet likes to buy the whole company to get it out of the hands of Wall Street.  No upgrades, downgrades, trashing the stock if it misses earnings.  His money is safer in his own hands.

Buying it outright gives him control of the Company and what Wall Street thinks does not matter.

LooseLee's picture

As one of the greatest 'teachers' that ever lived reportedly said, "It is easier for a camel to go through the eye of a needle than for a 'rich' man to get to 'Heaven'. Unfortunately, Buffet is nothing more than a glorified welfare queen....

Yen Cross's picture

 Warren the tool Buffet, needs to lay off the Herbalife. Carl Icahn needs a new fisting friend. Warren Buffett's Burlington Bet - Business Insider


   I just barfed up a lung!

Prairie Dog's picture

You can eat potatoes. You can eat pork. Silver can be used to make electrical conductors and batteries. What can gold be used for?

jimmyjames's picture

What can gold be used for?


You can shove gold up your ass--try doing that with a potatoe-

tola bars have two distinct characteristics: Their edges are smooth and round, which is said to be ideal for smuggling.

econature's picture

Gold can be used as a medium of exchange, as opposed to straight bartering. No one wants to have to find someone willing to trade their berries for a spatula, the spatula for the wheel, the wheel for the egg, the egg for the knife, and finally the knife for the fork that you ultimately wanted! Wouldn't it be easier if there was some universal medium of exchange so that you could go straight to the fork maker and avoid this bartering hassle?

There was always be a market for a universal medium of exchange. Paper money would work in a vacuum, but not when politicians can abuse it.

Why gold, and not rocks, or Full House DVDs? Simple: it's rare (but not too rare), durable, malleable, measurable, portable, and doesn't rust. No other substance known to man has those characteristics. The Fed can't print gold, neither can the ECB. Gold is the quintessential medium of exchange. There will always be demand for it unless a better one is found. The price you pay for this medium of exchange is a different question. But, the Fed is finding dollars much faster than the GDX is finding gold.

Prairie Dog's picture

Does Buffett "hate" gold, or is he just making a statement of fact? The deficit of understanding here is on Tim Price's side.

Quinvarius's picture

No.  Buffet just hates gold because he understands what Tim Price is saying.

Downtoolong's picture

gold is clear– they can’t print it, they can’t default on it

And they can't know, tax, or control when you have and possess it. That's the real reason they hate it.