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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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Mon, 02/18/2013 - 19:37 | 3254405 MrX
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Warren Buffet doesn't realize that most savvy investors are solidly high as a kite.


Mon, 02/18/2013 - 19:42 | 3254427 NotApplicable
NotApplicable's picture

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


Mon, 02/18/2013 - 20:11 | 3254480 Fredo Corleone
Fredo Corleone's picture

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

Mon, 02/18/2013 - 21:06 | 3254556 Enslavethechild...
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.

Tue, 02/19/2013 - 11:00 | 3256007 SamuelMaverick
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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.

Mon, 02/18/2013 - 20:14 | 3254490 OutLookingIn
OutLookingIn's picture

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

Mon, 02/18/2013 - 21:27 | 3254598 Freddie
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." 

Mon, 02/18/2013 - 21:35 | 3254613 Joe Davola
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.

Mon, 02/18/2013 - 21:35 | 3254614 TraderTimm
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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.

Mon, 02/18/2013 - 19:40 | 3254424 kliguy38
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.

Mon, 02/18/2013 - 19:44 | 3254431 NotApplicable
NotApplicable's picture

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

Mon, 02/18/2013 - 22:44 | 3254744 Midas
Midas's picture

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

Mon, 02/18/2013 - 19:41 | 3254426 LongBalls
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.

Mon, 02/18/2013 - 19:47 | 3254435 NotApplicable
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)

Mon, 02/18/2013 - 19:47 | 3254434 Catflappo
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.

Mon, 02/18/2013 - 20:10 | 3254475 Hedgetard55
Hedgetard55's picture

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

Mon, 02/18/2013 - 21:21 | 3254583 Oldballplayer
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But admit it.  You would do the secretary that pays all of those taxes, wouldn't you?

Mon, 02/18/2013 - 21:37 | 3254618 Freddie
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. 

Tue, 02/19/2013 - 01:48 | 3255262 Oldrepublic
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His father Howard Buffet was a four term congressman from Nebraska

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

Tue, 02/19/2013 - 02:43 | 3255359 NidStyles
NidStyles's picture

He was about as Libertarian as Obama.

Mon, 02/18/2013 - 19:50 | 3254442 Silver_K-9
Silver_K-9's picture

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

Mon, 02/18/2013 - 20:07 | 3254471 OutLookingIn
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Mon, 02/18/2013 - 19:54 | 3254446 n.d.v.
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.

Tue, 02/19/2013 - 01:02 | 3255180 Freddie
Freddie's picture

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

Mon, 02/18/2013 - 19:54 | 3254447 km4
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.

Mon, 02/18/2013 - 19:56 | 3254449 dscott8186
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.

Mon, 02/18/2013 - 20:11 | 3254482 Hedgetard55
Hedgetard55's picture

Good point. How does devaluing your currency ATTRACT investment?

Tue, 02/19/2013 - 02:45 | 3255364 NidStyles
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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.

Tue, 02/19/2013 - 09:38 | 3255711 DosZap
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.

Mon, 02/18/2013 - 19:56 | 3254450 ilovefreedom
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.

Mon, 02/18/2013 - 19:57 | 3254451 Yen Cross
Yen Cross's picture

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

Mon, 02/18/2013 - 19:57 | 3254452 francis_sawyer
francis_sawyer's picture

I'll leave Warren Buffett to LongSoupLine...

Mon, 02/18/2013 - 20:08 | 3254473 l1b3rty
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Buffet should pull a DotCom and buy bitcoin...

Mon, 02/18/2013 - 20:42 | 3254523 francis_sawyer
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Might as well... He's already decided to piss it all away on eugenics research... Can't be much different...

Mon, 02/18/2013 - 20:09 | 3254474 sessinpo
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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.

Mon, 02/18/2013 - 20:17 | 3254493 Yen Cross
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 Buffet the Fluffer. Fixed it for you...

Mon, 02/18/2013 - 20:11 | 3254479 world_debt_slave
world_debt_slave's picture

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

Tue, 02/19/2013 - 00:02 | 3254989 Jim B
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Crony robber baron

Tue, 02/19/2013 - 02:47 | 3255368 NidStyles
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Robber Barons were cronies. Gah, Doesn't anyone read Tom Woods?

Thu, 02/21/2013 - 13:03 | 3263744 econature
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Yes. I watch his lectures, too. He's fantastic.

Mon, 02/18/2013 - 20:16 | 3254492 Waterfallsparkles
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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.

Mon, 02/18/2013 - 20:18 | 3254495 LooseLee
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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....

Mon, 02/18/2013 - 20:29 | 3254500 Yen Cross
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!

Mon, 02/18/2013 - 20:43 | 3254524 Prairie Dog
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You can eat potatoes. You can eat pork. Silver can be used to make electrical conductors and batteries. What can gold be used for?

Mon, 02/18/2013 - 21:50 | 3254633 jimmyjames
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.

Thu, 02/21/2013 - 13:11 | 3263788 econature
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.

Mon, 02/18/2013 - 20:43 | 3254525 Prairie Dog
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.

Mon, 02/18/2013 - 21:27 | 3254602 Quinvarius
Quinvarius's picture

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

Mon, 02/18/2013 - 21:35 | 3254612 Downtoolong
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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.

Mon, 02/18/2013 - 21:52 | 3254639 They Tried to S...
They Tried to Steal My Gold's picture

Mark my words Comrades...WE'll find out one of these days when the shit hits the fan that:

Berkshire Hathaway owns a few mines - He wont own finished gold bars or coins 

and when asked about it - "well they were dirt cheap and we thought it would be a good hedge against our other portfolio properties and we thought we could turn them around"

Buffett: " You know me ....I like buying things cheap...." 




Mon, 02/18/2013 - 22:03 | 3254655 NoWayJose
NoWayJose's picture

I have abandoned the battlefield. Holding cash and gold, and I have't chased stocks since early January. I sleep well at night now knowing that gold will either go up and I will smile, or gold will go down and I will smile because I can buy more at a cheaper price. I do not fear the market dropping or any bubble bursting.

Mon, 02/18/2013 - 22:22 | 3254683 IamtheREALmario
IamtheREALmario's picture

The problem with gold is that the crooks who set the price of gold, set the price at a much higher level than the inflation adjusted price of pretty much everythibng that people need on a daily basis, such as food, shelter and energy. While gold might be stable (contrary to all market indications) it is overprice and you cannot even eat it, stay out of the rain under it or plug your iPhone into it.

IMO, gold will continue to be overpriced and underappreciated leaving it to be traded amongst banks and the tools of banks and not something people buy and hold for a rainy day.

Mon, 02/18/2013 - 23:08 | 3254809 Parrotile
Parrotile's picture

Would that be "real" gold, or the popular "Tungsten-reinforced" variety??

Personally I can think of many assets far more valuable than a lump of metal - such as a secure clean water supply, good quality arable land (with reliable rainfall), the knowledge base and experience to efficiently use said land (and maintain the equipment you will need to use it).

Might be worth adding the proviso that said land package will be far enough away from Metropolitan centres to reduce the likelihood of "unwanted hungry visitors" should times become "interesting".

Mon, 02/18/2013 - 22:30 | 3254707 zerotohero
zerotohero's picture

Buffet knows he is not long for this world - why not do a George Castanza and do the complete opposite of what he would naturally do - break the bonds and trends that he has been enslaved to for decades and show the world what is really going on.

Mon, 02/18/2013 - 22:35 | 3254721 Yen Cross
Yen Cross's picture

  His son will carry the torch. warren buffets son - Google Search

Tue, 02/19/2013 - 02:34 | 3255345 Lordflin
Lordflin's picture

Once the smoke clears gold and silver will be all that is left standing on the battlefield.

Tue, 02/19/2013 - 02:48 | 3255366 New American Re...
New American Revolution's picture

You don't understand his perspective.  If you did, you would have written this instead.

Tue, 02/19/2013 - 04:39 | 3255463 Curiously_Crazy
Curiously_Crazy's picture

"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."

What a load of shit. Note the countries with high net foreign assets tend to be the ones with bugger all internal natural resources. Australia is apparently negative 80 odd% but we can produce enough food to feed ourselves without imports should it be required - among the highest wheat producers, sheep and cattle producers, we are among the top precious metals producers, top non precious metals producers (iron ore etc) have one of the highest natural gas reserves (a lot of our cars here run on LPG) hell I could go on and on (like the next sentence mentioning 'heavily debited nations, as those in the black'?!?! wtf Australias foreign debt is fuck all in REAL TERMS..  ZH has shown the charts several times).

Would love to see Canada in this chart as it's probably similar.


Tue, 02/19/2013 - 04:52 | 3255467 Curiously_Crazy
Curiously_Crazy's picture

Oh Australia is still AAA by all the ratings agencies. Many countries left in that group? (and yes I know on the whole their ratings mean fuck all but when all the 'big players' get downgraded but not au it says something)

Also the $au compared to the $us going from the 70 cents group to now over $1.04 well that really shows the chart works in terms of currencies don't it.

Tue, 02/19/2013 - 06:52 | 3255536 debtor of last ...
debtor of last resort's picture

Spain, Greece and Potugal are black as hell. They will have to leave the eurozone first.

Tue, 02/19/2013 - 08:33 | 3255608 Notveryamused
Notveryamused's picture

Warren Buffet is buying more gold than anyone.
1.He has bought 5 jewelry supply companies in the last year. (They buy gold and silver direct from refiners and sell them on.)
2. 'Jewelry' businesses will be immune from confiscation, investment gold will not.
(Business he bought October last year physically located at the refinery that has refined 1/3 of all gold mined since 1920.)

Tue, 02/19/2013 - 18:19 | 3257618 theprofromdover
theprofromdover's picture

Buffett hasn't the imagination to understand how gold works. He wouldn't have understood it when salt was a global currency; he would definitely understand the time when slave labour was a currency. He quite likes that arrangement. Time for your pill Warren.

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