Buffett Releases Annual Letter To Shareholders, Will Avoid Derivatives Going Foward, Continues Bashing Gold

Tyler Durden's picture




 

While mostly a regurgitation of old, very trite, and quite meandering thoughts, there are some tidbits of information in the latest just released 2011 Berkshire Letter to shareholders such as that Buffett has chosen a successor to the 81 year old increasingly more confused head (unclear who), that Buffett is on the prowl for large acquisitions, that he hopes IBM shares languish for the next five years (frankly we can't wait until Buffett opens a stake in Apple so he can control the two stocks that between them account for about half of the moves in the DJIA and the NASDAPPLE - after all "economies of scale" is all about how Nominal Buffett exudes 'success'), that he once again sees a housing bottom (he adds: "Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong" - this admission is far more than we will ever hear from James Cramer who has been calling a housing bottom since 2009), and "Housing will come back – you can be sure of that" - sure, just not in your lifetime, and probably not in ours either, but most importantly, is the discovery not that BRK's profit declined by 30% (to $3.08 billion from $4.38 billion) on a smaller gain on derivatives, but that since he actually will have to post collateral on new derivatives, "we will not be initiating any major derivatives positions." The reason: "We shun contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge posting requirement – arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack – is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength." So his warning that derivatives are WMDs years ago was only appropriate if there was money to be lost, such as is the case for 99.9999% of other investors? Ah, there goes the good old hypocritical, crony Warren we have all grown to known and love. And finally what would be a recent Buffett missive without the obligatory gold bashing section: after all, how will the Ponzi scheme inflate if people have realized it is a ... well, Ponzi, championed by none other than the person everyone once thought was actually an investing genius. Fast forward to Buffett's 2020 Letter (when Greek debt/GDP is precisely 120.5%) his main message will be: "I told you to run away from gold. I was dead wrong."

On gold bashing:

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

 

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

 

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

 

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis.

 

As “bandwagon” investors join any party, they create their own truth – for a while. Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

 

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge).

 

Can you imagine an investor with $9.6 trillion selecting pile A over pile B? Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

 

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. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

 

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

And so on. For a much more objective discussion on inflation protection, we strongly urge readers to read Jeremy Grantham's quarterly letter released yesterday. That and the previous 3 years of posts on ZH.

Perhaps while he is being Monday Morning quarterbacking on the mistakes of his career, it would also be wise for Buffett to admit that not he, but his farther was spot on on the topic of gold. That and leaving this world with some dignity, instead of being known as a shining crony beacon for a system that is implding more and more every day, and needs $14 trillion in central bank support (and rising exponentially) to prevent an all out implosion.

Full letter (pdf)

 

0
Your rating: None
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 02/25/2012 - 11:44 | 2195528 Cheyenne
Cheyenne's picture

Suck it up 'til you're dead, Warren, you fraud.

Sat, 02/25/2012 - 11:50 | 2195540 resurger
resurger's picture

By Jeff Clark, Casey Research

hear that you've had some worries about me. I understand. Your world is a very uncertain place right now. And when it comes to money, it looks as though your leaders don't understand some basic monetary principles, making things even more unsettling.

But I want you to know that the problems you're experiencing are actually nothing new. I've seen these monetary, fiscal, and economic difficulties many times before. And I can tell you this: you're safe with me. That's a bold proclamation, but I've provided monetary protection numerous times throughout history – too many to count, in fact. I've served all kinds of people over the centuries, from kings and counts to serfs and servants.

To put your mind at ease, let's review my core characteristics, along with some history, to show how I can protect you against the monetary danger that's likely to worsen in your near future. We'll also take a look at your peculiar set of circumstances to see how I can be of service. By the time we're done, I think you'll feel much better about my ability to help your portfolio withstand whatever is thrown its way.

Enduring Characteristics

Let's start with the basics. I have some characteristics that no other matter on Earth has… I cannot be:

  • Printed (ask a miner how long it takes to find me and dig me up)
  • Counterfeited (you can try, but a scale will catch it every time)
  • Inflated (I can't be reproduced)

I cannot be destroyed by;

  • Fire (it takes heat at least 1945.4° F. to melt me)
  • Water (I don't rust or tarnish)
  • Time (my coins remain recognizable after a thousand years)

I don't need:

  • Feeding (like cattle)
  • Fertilizer (like corn)
  • Maintenance (like printing presses)

I have no:

  • Time limit (most metal is still in existence)
  • Counterparty risk (remember MF Global?)
  • Shelf life (I never expire)

As a metal, I am uniquely:

  • Malleable (I spread without cracking)
  • Ductile (I stretch without breaking)
  • Beautiful (just ask an Indian bride)

As money, I am:

  • Liquid (easily convertible to cash)
  • Portable (you can conveniently hold $50,000 in one hand)
  • Divisible (you can use me in tiny fractions)
  • Consistent (I am the same in any quantity, at any place)
  • Private (no one has to know you own me)

I am internationally accepted, last for thousands of years, and probably most important, you can't make any more of me.

read more

http://www.marketoracle.co.uk/Article33293.html

Sat, 02/25/2012 - 11:55 | 2195548 Future Tense
Future Tense's picture

Excellent post Jeff.  It is strange that Buffett continues to hold such a large cash holding (not diversifying into gold) when he clearly understands the nature of the markets (which could be seen with his silver purchase back in 1999).  Someone needs to send Buffett this excellent video that asks if you should hold gold or cash in a safe over the next 5 years:  

http://www.ftense.com/2012/02/gold-bullion-or-cash.html

Sat, 02/25/2012 - 12:00 | 2195557 spiral_eyes
spiral_eyes's picture

Yes gold is awful. Not only is it a bad investment — having consistently obliterated the S&P over the last decade (when was the last time gold over-compensated its CEO? Or co-mingled customer funds? Or took a bailout because its business model had failed? Or was caught hold triggered CDS? Or caused Deepwater Horizon?), it should be obvious to anyone who can read a chart that only fiat currency can truly deliver price stability.

Or um... not.

http://azizonomics.com/2012/02/25/price-stability/

Sat, 02/25/2012 - 12:23 | 2195594 trav7777
trav7777's picture

Buffet is a moron.  Gold produces NO DIVIDEND people.  These days, neither do most financial assets.  Including most gov't paper.

And this compounding...LOL.  Buffet still thinks we are going to grow grow grow.  At this point, he knows he'll be dead long before the proof ever manifests, so he can afford to just tout the optimistic line.

Sat, 02/25/2012 - 12:37 | 2195631 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Correct, and because it has no dividend it is considered an aggresive growth investment.  And I agree, becaue it has shown aggresive growth.

Sat, 02/25/2012 - 12:40 | 2195645 Harlequin001
Harlequin001's picture

Since when does it need to produce a dividend?

and since when did anything else other than through printing more money?

Sat, 02/25/2012 - 13:24 | 2195710 I think I need ...
I think I need to buy a gun's picture

i remember when warren pulled his tickets to his event so no one could make a profit on ebay, a small profit at that, these guys are really nuts AND THEY WANT IT ALL, it doesn't even make any sense i can hold a dollar or hold a flake of gold whats the fucking diffence they are both in the bank sitting i can't eat either.                                        FUCK YOU WARREN!!!!!!!!!!!!!!!!!!!!!!!!!When gas is $10 and a steak is $35 can i bring the kids to visit so we can fuckin eat???????????????????/

Sat, 02/25/2012 - 15:06 | 2195732 Don Birnam
Don Birnam's picture

One wonders if Uncle Warren's personal media courtesan and professional drawer of baths, Rebecca Quick, if presented with the choice, would prefer a properly-assayed, yet non-procreative, 1 kilo pile of Credit Suisse's .999 finest, or the equivalent in multicolored, paper legal tender ?

http://4.bp.blogspot.com/_S4eijoYPUPA/S1m3Q7sJMdI/AAAAAAAAAh4/g2qiBwN0qp...

Sat, 02/25/2012 - 17:49 | 2196252 earleflorida
earleflorida's picture

becky is a fine [hot!] looking woman, period!

although, can't quite figure out why she's on cnbc -- just sits in the corner looking at the camera - such a waste

jmo

Sun, 02/26/2012 - 09:31 | 2197483 Chuck Walla
Chuck Walla's picture

 

becky is a fine [hot!] looking woman, period!

although, can't quite figure out why she's on cnbc -- just sits in the corner looking at the camera - such a waste

 

 

Yep, that girl needs a brass fire pole sumthin awful. long as she gonna Ho fo' Warren da Pimp, she need to look the part, feel me?

Sat, 02/25/2012 - 13:36 | 2195735 Rogier
Rogier's picture

I think you need some soap to wash out your mouth.

Sat, 02/25/2012 - 12:37 | 2195632 Harlequin001
Harlequin001's picture

'an out-of-the-blue event such as a worldwide financial panic' - and there you have it, as close to an apology for what is about to happen as you will get...

Sat, 02/25/2012 - 12:47 | 2195649 The Big Ching-aso
The Big Ching-aso's picture

 

 

"......unquestioned financial strength."

What a douchewoggle.

Sat, 02/25/2012 - 13:18 | 2195700 Careless Whisper
Careless Whisper's picture

"Stop bitchin' about a little bail out." Charlie Munger, 2008.  (4 real)

Sat, 02/25/2012 - 12:50 | 2195653 BidnessMan
BidnessMan's picture

Wow!  First of your posts I have ever agreed with. Something big must be about to happen. 

Sat, 02/25/2012 - 19:23 | 2196391 s2man
s2man's picture

Yeah.  That was weird.

Sat, 02/25/2012 - 12:28 | 2195601 nope-1004
nope-1004's picture

Buffett was a particular personality during a pariticular time.  His success was largely due to the economic and structural circumstances, not personal aptitude.  You can see now that if he were just starting out, he'd not only be broke, but shunned in the investment community.

A true oracle would know when his time is up and would step aside.  Since he doesn't, his future demise will be played out and analyzed publicly for all to see.

 

Sat, 02/25/2012 - 12:31 | 2195621 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

True oracles can change their philosphy ahead of trends.  They can see the next trend before it happens.  That is an oracle.

Sat, 02/25/2012 - 18:23 | 2196296 TheSilverJournal
TheSilverJournal's picture

While it is entirely possible, as Buffet says, that gold “will compound over the century at a rate far inferior to that achieved by productive assets,” currency collapse isn’t happening 100 years from now, it is happening now. Give me gold. No, give me silver, which is more undervalued and has greater demand in industry, therefore meeting another criteria of Buffet’s as a good investment.

TheSilverJournal.com

Sat, 02/25/2012 - 12:54 | 2195659 Colombian Gringo
Colombian Gringo's picture

His success was due to being an connected insider. If you were able to access billions practically cost free and get tipped off on deals, you would also be rich.

Sat, 02/25/2012 - 15:59 | 2196063 Don Birnam
Don Birnam's picture

Absolutely correct, nope-1004.
+1

Sat, 02/25/2012 - 13:44 | 2195756 williambanzai7
williambanzai7's picture

AMERIKAN OLIGARCH

Sun, 02/26/2012 - 08:58 | 2197434 MFL8240
MFL8240's picture

Who really knows what that liar holds in offshore accounts.  Believe nothing that comes out of Obamas mouth or Buffetts, they are total phony's.

Sat, 02/25/2012 - 13:29 | 2195699 SMG
SMG's picture

Buffet is wrong of course.

He is one of the Oligarchs though, and therefore has inside info on "The Oligarch Master Plan (tm)".

He keeps attacking gold publicly for a reason,  I would bet he knows something, ie. a planned takedown.

Which would be fine by me, I would just use the opportunity to increase the stack.

Don't know this for sure, just thinking out loud.

Sat, 02/25/2012 - 14:24 | 2195882 palmereldritch
palmereldritch's picture

If not a planned takedown then their tried and true firewall of forced confiscation.  They've done it before...probably the last time they thought they could roll out global consolidation...and then Hitler went off script.

Sat, 02/25/2012 - 16:04 | 2196076 chubbar
chubbar's picture

The last time they confiscated gold they had a good (in their opinion) legitimate reason, they couldn't overcome the deflation without increasing the money supply. Since that isn't a problem any longer, what reason will they have to outlaw gold, assuming they actually have a constitutional right to control private ownership of a metal (I know they think they have this authority)? With widespread ownership in India, China and other lesser populated countries it would make the U.S. Gov't (the beacon of world freedom) pretty damn stupid looking. To say nothing of the black market that would pop up because NOBODY and I mean NOBODY is going to turn their metal into these bunch of fucking crooks. If they are coming for your metal it means they are killing your family and any chance they had to provide for themselves outside of serfdom. Might as well fight as put up with that shit.

Sat, 02/25/2012 - 16:38 | 2196126 palmereldritch
palmereldritch's picture

I think the New World Order starts for them in the New World of North America. The US and its Constitution is that beacon of freedom that has been in their cross hairs for a long time. 

Interesting that GMO food is force fed to the population here now with, it is proposed, proper labelling and identification of the toxic sterilizing Frankenfoods being barred by law while in Europe it must be identified.  I will give the EU apparatchicks credit for that one. IMO, NA is a different type of social engineering takedown with an emphasis on what appears to be de-population. Maybe Bill Gates plans on being the game warden when all the re-wilding is complete...

Sun, 02/26/2012 - 09:38 | 2197489 Chuck Walla
Chuck Walla's picture

@chubbar  They don't mind stupid if it means they survive. Look at the crap that comes out of Obama.  All the world knows what a crock he is usually spouting, but here, the compliant, antique media gulps down load after load praying for more.  And the deliberately  undereducated believe

Sat, 02/25/2012 - 15:09 | 2195892 JW n FL
JW n FL's picture

 

 

I am internationally accepted, last for thousands of years, and probably most important, you can't make any more of me.

read more

http://www.marketoracle.co.uk/Article33293.html

but.. But?! BUTT??!! you still cant fold it or eat it!

Warren is getting old..

have a heart..

he either has to carry Gold, which is metal.. or fold paper in his pocket..

once again! he is old, he has had a rough life filled with bribing / lobbying the whores in Washington DC..

paper is easier for his old worn out bones.

 

"You are a den of vipers and thieves. I intend to rout you out, and by the Eternal God, I will rout you out..."

Sat, 02/25/2012 - 19:35 | 2196423 halflink123
halflink123's picture

I do agree with WB in one respect: it's dangerous to buy any asset regardless of price.  

See, the problem is, WB belives gold is NEVER a worthwhile investment, at ANY price, despite its obvious powerful historical monetary properties.

Meanwhile, zerohedge readers believe that gold is ALWAYS a worthwhile investment, at ANY price.

Either view is dangerously similar to the other.

Therefore I disagree with ZH and WB! Cool, huh?

Sat, 02/25/2012 - 12:28 | 2195612 JD59
JD59's picture

Buffet wants to keep his fiat dullars valuable.

Sat, 02/25/2012 - 12:29 | 2195615 JD59
JD59's picture

Buffet wants to keep his fiat dullars valuable.

Sat, 02/25/2012 - 12:39 | 2195639 LongSoupLine
LongSoupLine's picture

 

 

Q. What do Buffett and a child molester in a Santa suit have in common?

 

A. Sure they both look and act harmless and trusting, but...

Sat, 02/25/2012 - 13:02 | 2195670 brewing
brewing's picture

You cannot become what you despise. Subconsciously, you sabotage your own ability to accumulate wealth if you hold grudges or jealousy...

Sat, 02/25/2012 - 13:08 | 2195679 gibbs
gibbs's picture

A drunk could steal your wallet and feel guilty about it but people like buffet will steal your wallet and then offer to help you find it.

It's pretty easy to be a so called "great investor" when you have puppets in DC to bail out your bad nvestments, feed you inside information and keep your get-out-of-jail free card up to date.

Sat, 02/25/2012 - 13:25 | 2195716 rbg81
rbg81's picture

Whatever credibility Warren Buffett once had, he has completely lost.  He is now nothing more than a tool of the Socialists in general and the Obama Administration in particular.  Whenever I hear anything coming out of his mouth, I try to do the opposite.  As Chris Christie said, WB should just write a check and STFU.

Sat, 02/25/2012 - 19:29 | 2196402 halflink123
halflink123's picture

Umm...who do you think Christie works for?  People like Warren Buffett.

Christie believes in corporate socialism, aka crony capitalism, just like Buffett and Obama.

If you think there's any difference between the mainline establishment Democrat or Republican parties, you are dead wrong.

That's why most people on this site or with some sentience only want for RON PAUL to win. 

Sun, 02/26/2012 - 09:49 | 2197496 Chuck Walla
Chuck Walla's picture

Whatever credibility Warren Buffett once had, he has completely lost.  He is now nothing more than a tool of the Socialists in general and the Obama Administration in particular.

 

Remember, Obama and his ilk ARE NOT SOCIALISTS!  These are good Capitalists, they are not giving up what's theirs. They mean for everyone else to give up what they have to the Obama's, et al.  They only mean to enslave us plebes, not disadvantage the kleptocracy and its hangers on.  No, Braack talks like a Socialist to hold his idiot base, such pretty words, free gifts for all.  But like Warren, when it comes time to throw down cash into the pot, not a chance.  Not when they have such a large pool of unwitting suckers to fleece.  Talk is far cheaper and he's a 1% hero to the ignorant.

Sat, 02/25/2012 - 13:50 | 2195772 midtowng
midtowng's picture

Buffett is 100% correct that $9 Trillion in farmland and Exxon-type companies is worth more than $9 trillion in gold.

What Buffett gets wrong is to compare gold to farmland. Gold is only in competition with one thing: paper money.

So the real question is: why is Buffett holding paper money, and why does he prefer it to gold?

Sat, 02/25/2012 - 19:30 | 2196407 halflink123
halflink123's picture

Exactly right. Buffett is using a straw man argument, a false analogy.

The only question is, which measure of money to use in comparing it with gold + other metals, and why hasn't this ratio remained more or less constant throughout time?

Sat, 02/25/2012 - 23:47 | 2196845 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Gold is not the only thing in competition with paper money.  With that line of reasoning, anything you exchange paper money for is in competition with it.  I think Buffet has a point about gold.  If you think there is likely to be a currency crisis and hyperinflation then dividend paying energy stocks are better than gold because they are backed by hard assets that throw off cash.  Based on negative rates of growth in disposable income and the present low yields on AAA corporate paper, we are not even close to a hyper-inflation scenario.   So just be patient and wait for the bust in the stock market because, once rates start to rise, you will be able to back up the truck for the NYSE once a century 85% off sale.

Sat, 02/25/2012 - 13:54 | 2195783 LasVegasDave
LasVegasDave's picture

what crony capitalist numero uno fails to mention is that anyone can buy gold.  not everyone can afford 1000 acres of farmland.

 

 

Sat, 02/25/2012 - 15:00 | 2195957 prole
prole's picture

True true, he also failed to mention that you can own, really own gold and silver. Big Brother owns 100% of the farmland you can only rent it. And big brother can up the rent at any time to any level he likes. Then kick you  out and not let you pretend you own it anymore.

Sat, 02/25/2012 - 23:07 | 2196851 Lucius Corneliu...
Lucius Cornelius Sulla's picture

No, but $1700 will buy you about 17 shares of Chevron.

Sat, 02/25/2012 - 11:48 | 2195529 SilverDoctors
SilverDoctors's picture

He's just bitter and resents PM's now because he was blackmailed into dumping his silver position.  Heck, maybe ole Warren was the buyer on the other side of the cartel dumping 102.5 million ounces of paper silver on the Globex in 7 minutes yesterday afternoon, only to see the raid fail as somebody had a buy algo ready for the raid!

http://silverdoctors.blogspot.com/2012/02/cartel-dumps-1025-million-ounces-of.html

Sat, 02/25/2012 - 11:55 | 2195546 Deo vindice
Deo vindice's picture

If Mr. Buffet had to do all his investing under the same rules as 'normal guys' just how much wealth would he have?

Regardless, you can't take it with you, Warren.

"What shall it profit a man if he gain the whole world and lose his soul?" (Matthew 16:26)

Sat, 02/25/2012 - 19:31 | 2196414 halflink123
halflink123's picture

He would still have a ton of money. WB compounded money at 60% a year as a small fry working for Ben Graham.

Sat, 02/25/2012 - 12:04 | 2195563 Deo vindice
Deo vindice's picture

@SilverDoctors

We know who was dumping the paper silver. Wonder who was on the buy side? Hmmm.

Thanks for the graph. Very illuminating.

Sat, 02/25/2012 - 12:15 | 2195577 francis_sawyer
francis_sawyer's picture

Buffett: "After these purchases, we would have about $1 trillion left over for walking-around money"

Walking around money?

http://www.pagetutor.com/trillion/index.html

(scroll to bottom)

~~~~

I guess that's how an idiot like Buffett envisions himself walking around... But shit, at least that ought to be enough to buy yourself a better hoe than Becky Quick...

Do NOT follow this link or you will be banned from the site!