In his new letter to shareholders, Warren Buffett shows once again that undeniably great success does not equate to infallibility. His enormous accumulation of experience and manifest ability at what his brand of investing doesn’t make him the best source of guidance on other matters.
Who am I to criticize a man who’s made 1,000 times as much as I have on the markets?
I am, like you, a thinking person who can—and must—make my own judgments. Blindly following even the greatest leaders only works until they get something critical wrong.
Buffett’s critical mistake is his stubborn refusal to see gold as anything but the barbarous relic mainstream thinkers of his generation have made it out to be.
Specifically, Buffett wrote:
"Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods.
"That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To ‘protect’ yourself, you might have eschewed stocks and opted instead to buy [3.25] ounces of gold with your $114.75 [Buffet’s first investment 77 years ago].
"And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle. [$114.75 would have grown to $606,811 if invested in a no-fee index fund tracking the S&P 500.]"
Now, I’m not here to preach doom, but I would argue that this comparison is deeply flawed and misleading.
The main reason Buffett is wrong is that history shows that all great powers fade away in due course, and all attempts to use unlimited supplies of worthless things as money have ended in failure.
All good things come to an end—as will the hegemony of the US dollar. This is a trend gathering visible speed on the global stage today.
That doesn’t mean doom is around the corner. It does mean that preserving some of one’s wealth in physical assets to which there is no counterparty risk is a prudent thing to do. When the brown stuff hits the fan and gold and silver may be the only form of money people around the world will accept, it will be too late.
I’m talking about insurance—a concept Buffett should understand well.
In this context, dismissing gold because other investments might have returned more seems like willfully turning a blind eye to gold’s main use and value.
Even if we look at gold as an investment, it’s not a valid comparison because:
- Gold was price-controlled for 30 of the 77 years Buffett writes about.
- There was no “no-fee index fund tracking the S&P 500” 77 years ago. I believe the first S&P 500 index fund (with a fee) was set up in 1976.
- The Fed intervenes to prop stocks up, but not gold. (And beware because the Fed's interventions can't last forever.)
Buffett might fire back with a “So what?” Why should anyone care about why gold underperformed the S&P 500 more than the fact that it did?
Well, my first point about gold as insurance against calamity remains the main answer.
But I’d also say that gold is a form—the world’s oldest form—of money. The correct comparison here is not to the S&P 500, but to cash. And we all know how well gold has done against the world’s various fiat currencies since prices were freed in 1971.
Further, it’s not necessary for the there to be a financial apocalypse to make money on speculating on gold… stocks.
This is a very different thing from putting savings in precious metals against a rainy day. Stashing precious metals has, in fact, saved the day for my family when we desperately needed it.
Speculation—largely on gold and silver stocks—has transformed my life from one of constant penniless struggle to… one of far greater comfort and real net worth. This is what I learned to do from mentors like Rick Rule and Doug Casey. It was Doug who got me started as a speculator 15 years ago.
I can’t calculate the gain as a percentage, as there was no single starting investment. And I haven’t been at it 77 years. But I’ve done well—and I hope to beat Buffett’s record by the time I’m his age.
I do understand that it's hard for a man who's seen something work for decades to believe—or even conceive—that the rules of the game are going to change radically soon.
I also get that “doom” has been a no-show for many years. That doesn't mean things will never change.
Change is, indeed, the only constant in history.