Buffet's Letter

The WealthCycles Staff

Here are Warren Buffet's comments in his letter to shareholders from the Berkshire Hathaway's annual report. We will release our comments tomorrow but we want to hear what you think first. 

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. 
His father's take on the same subject.

A dividend is an annual payment made to stockholders from the company’s profits. The dividend yield is calculated by dividing the annual dividend by the price paid for the stock, to determine the percentage dividend yield. For example, if you pay $10 per share for a stock and receive $0.60 in dividend payments annually, then your dividend yield is 6%.  

I wouldn't want to own oil companies for eternity either...or any fossil fuel or any company related to it over eternity.


Perhaps we should look at this from a different angle.

Let's say you purchase 16 exxon mobiles....and you do so when we hit peak oil (right now probably)...when countries and people first realize that peak oil is real....and the peak has been attained....what happens to all fiat currencies, companies with production in different countries, miniing companies who SUCK fuel down, etc?

If energy, more importantly oil, becomes scarce...hoarding will probably occur...then probably war, etc.

When energy becomes scarce...energy intensive processes that yield usable products (like minerals from the earth) will become very valuable. If people realize that exxon and Conoco just lost most of their assets to countries from nationalization.....how much would they be worth? If economies cannot grow....and bonds and money is still being issued at an exponential rate to pay interest payments....what happens to the value of the currency?

I look at the world where wealth is measured by physical items possessed and the health and lifestyle an individual lives. Energy, mainly from fossil fuels, has a life span.....that includes nat gas, coal, oil, uranium.....and by my research...almost all of these forms of energy are about to hit a natural limit...or peak of net free energy.

How does one invest in a world where net free energy declines? Stocks won't nearly be as plentiful when energy constraints come.

Money in itself is worth nothing...silver is worth everything as its the basic element of the technological age with diminishing net free energy available.

And good luck to all who thinks we have alternatives with billions of batteries, solar power, wind turbines, and nuclear generators.

a fun fact. the world uses 3 cubic miles of oil worth of energy....project to be 5 by 2030.

1 cubic miles of oil worth = 250,000 solar panles installed on roof tops a day for 50 yrs.

1 cubic mile of oil worth = 1,300-1,400 of the large wind turbines installed weekly for 50 yrs.

1 cubic mile of oil worth = 1 of the largest nuclear power plants installed weekly for 50 yrs.

Only time will tell who is right in the end i am sure that all the readers at WealthCycles and buyers of gold and silver are getting themselves ready for the fall that is coming. Lets be critical thinkers now honestly how many people of the 7billion on the planet have actually purchases gold or silver it would not surprise me if it is less than 5%

Also something to note i dont recall him stating that Gold has monetary value

Only time will tell who is right in the end i am sure that all the readers at WealthCycles and buyers of gold and silver are getting themselves ready for the fall that is coming.

Also something to note i dont recall him stating that Gold has monetary value

Pile A = Money = Apples
Pile B = Investments = Oranges


By staying out of the financial heard Mr. Buffett has my respect. You cannot argue with his success but you can disagree. He is not perfect nor has he said he is.
His view of gold is a logical argument that brings his insight on the overall financial situation. It is interesting that he does not point out the massive debt that the citizens of this country are going to have to pay in near term. He is leading us to belive that by putting money into stocks that you will have prospered more in value and paper money than if you owned gold. The velocity is quicker and more tangable. I feel like he is a car salesman who is trying to sell the same car to a person who just had it totaled. Only this time it will be better. Financil education is what helps people from following this insight. Those who follow his advise will say he is the best at what he does and why go against him? Easy, his cycle is overvalued (stocks) and businesses. He needs volume to play his game and that is not happening. His game has lost the trust of the masses. In history this is one of the many signs that change is coming to our economy as well as our society. He is telling the heard to be calm and all will be well if you just put your faith back into the system.
I for one did step out of the heard and will only step into the stocks when I know it is in my favor and not just give money to "professionals". I use Gold and Silver as insurance in most cases but today it is increasing its value. Just like a house or other hard asset. He likes assets that give both cashflow and capital gains. You cannot argue with that logic. But it is not producing a product of increasing value....paper money. Looking at the charts that are on Mike's other web site proves that. You will have to produce more and more at an increasing velocity.
There is a lot to say about what Mr. Buffett states in this report, he is a proven investor. There is a bias upward in the market. But by following this web site that Mike has created and others. You can see through the sales pitch and know what he trying to do.
Heard his masses and keep them calm.

Buffet loves fiat money. He loves that the Federal Reserve can print trillions of dollars whenever it wants.

At one time, Buffet might have been honest. But today, he is either dishonest, unethical or committing acts of fraud. He thinks he is "above the law." He is morally bankrupt.

The only thing he is consistent at is being totally inconsistent!

He supports Obama, enough said!

I suspect the more likely case is that this falls under Buffet's own famous admonition: don't invest in something you don;t understand. He understands securities; he does not understand gold.

The point Warren Buffett has missed is that gold is in its' rising cycle. It will not stop climbing until the problems in the current system get cleaned out and a new system that people can have faith in replaces it.

What are the owners of pile B going to take for payment?

I think Buffet does not understand the Kondratieff cycle. Gold will not always outperform but in the winter it does! furthermore it is my understanding that his father lost a lot of money on gold. I also know a lot of people who made their fortune with real estate. for them it is a paradigma shift and they keep believing in what worked for them. my challenge will be to say goodbye to gold when the cycle moves. and his comparison with tulips is non sense. that was only a short episode. gold has been a currency for ages.

I actually understand and agree with what Buffet is saying... *on a long-term scale*. He is correct that gold doesn't produce anything; on a long term scale it merely holds value.

But right now I'm nervous about owning companies, because they only have value when people are paying for their goods and/or services. What will happen if we hit hyperinflation? Will people be able to spend much on Buffet's beloved See's Candies? Will they continue to pay the Gecko for car insurance? Will BNSF continue to move millions of tons of goods over thousands of miles of track?

Now, long-term I expect that BRK and most (or even all) the companies it holds significant stakes in will survive the Armageddon that we seem to be facing. So investing in BRK or KO or some of these other companies would probably be a safe investment. But if fit hits the shan I expect gold and silver to perform exceptionally well; better than BRK or it's holdings.

I really use to look up to this guy, REALLY Buffet!!!!! I didn't know that he pitches for the other side which thinks that most human beings are financially illiterate, and will believe anything that's said by the mainstream media (sheeps). Thanx for the insult.

Buffet here desribes gold as an asset - the capital appreciation type, not the cashflowing type.

But really gold & silver are "real money".

Would u rather hold fiat currency in these times, or gold. These currency are backed by nothing & is being printed crazily these years, causing its value to deflate every second u hold onto them. It's daylight robbery!!! by the central bankers on us.

One should have gold, silver & some form of Pile B. And only enough currency for a few months' expenses.

Warren may be quite right, but we are not wrong too.

In a way Warren said cropland and oil is worthy, he is right! When fiat currency/bond bubble burst, people will rush to hard asset, food, oil, and corpland which produce food too. But people, in an untrust to printed money, will also rush to gold/silver which although have no intrinsic use (especially gold), are the basic vehicle for trading and preserve wealth, otherwise we can only trade my surplus shoes to your surplus pork.

When the fear comes to public, people will sell as much as money in their hand and in bank, they will exchange for hard and durable asset, like rice, canned food, shampoo (but we cannot store drums of oil at home), here gold/silver is one choice... then anything link with paper, like ETF of rice, stock certificate of ExxonMobil, asia currency -- are in doubt.... then paper money(especially currency and bond of high debt nations of USA, Europe, Japan) are the worst.

Buffet's is good investor and not a good economist. He is stuck with his investments and needs govt to bail him out or a lot of suckers who can buy stocks for him to exit. His words are good for him. He has a bright future bit not for all Americans.
I wont be surprised that Buffet exist before his company looses a lot of value and he blames his successor for the goof-up.

"Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end."

Indeed so... and I, for one, find that thought quite comforting. Fiat currency, on the other hand, melts away and disappears LONG before eternity will arrive. This is why a lot of people, as well as all central banks own precious metals. They are real. They are not Enron or Worldcom shares and they have zero counter-party risk.

I notice that nowhere in Mr. Buffet's comments can we see any mention of the trillions of new fiat dollars flooding the market, which absolutely forces gold prices higher in fiat dollar terms whether or not additional buyers come into the gold market.

Warren Buffet is one of the great value stock investors of all time. He has admitted many times that he is successful because he invests in what he knows. This is why he has never invested in tech stocks, even though a great deal of money has been and continues to be made there. I suggest that his knowledge of precious metals is equal to his knowledge of tech stocks, which is to say, nil.

Pile B, like gold, is subject to valuation variables tied to demand - the nominal price of equities in pile B will rise if the ranks of those who want to own them swells, the price will go down when demand flags. The key is, as Buffet realizes, buying when something, either from pile A or B, is undervalued. I believe pile A is more undervalued than B right now.

buffet is right as usual if you need to invest once and forever. he does not account for a Trade when you turn on swings. he doesnt trade really he invests. and he may well live to 130 yo with his fortune and an army of geriatrists. unlike most of us.

"Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end."

As opposed to owning:

US dollars for the last century or any currency for an eternity.
Owning shares in Enron and/or many other "like kind" companies until the end.
Owning White Star Lines which built the Olympic, the Titantic, and the Brittanic.
Owning the DeLorean Motor Company.
Owning shares in Pan Am back in the day until the end.
Owning Commodore Computers.
Govt. Bonds from collapsing countries throughout history.

Which of these preserves purchasing power over an eternity?

History has shown that Mr. Buffett needs us to continue to play in his paper casino and when things go bad and he's holding way too many risky financials he cries for a bailout from the govt.

And yet like the food and the oil, the gold will still be scarce. Thus, it's value, Warren.

"The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. " thats why it is money..

Buy gold for wealth preservation, and silver for wealth generation. Have both silver & gold.

It's a pitying sum of what I can buy in Pile B with what little currency I have now. When gold & silver peaks, sell & buy Pile B (or whatever is undervalued & beginning to climb), to get more of it. Just that gold is in its cycle now. It takes a lot of guts & patience, much more than I thought needed initially, to hold Precious Metals. I never wish to go through this again, and waiting patiently to get rid of these Precious Metals for cashflowing assets. It takes guts.

I have to say, for the most part - I agree with Mr Buffett. For his 'intrinsic investing' style, gold does not really produce any added value to anything in particular. And he is aptly speaking about the difference between what Kiyosaki also mentions frequently - the difference between traders and investors.

But I would also have to throw in some of Mr Buffett's own advice - "Don't ask the barber if you need a haircut". It's Buffett's job to make the stock of his companies worth more. It would be counterproductive of him to say -

"Wow, gold is undervalued, get in now...and by the way, move all your cash out of my company and plummet the stock in the process"

Oh, and lets not forget however many bajillion ounces of silver he purchased early last decade that shocked the market- silver almost as 'useless' as gold.

Buffett has not included in his calculations the potential 100x multiplying effect the derivatives and COMEX market will eventually show.

But whether Buffett is right or not over his 'compound over the century' calculation - I'm not particularly interested. He's probably right - but the whole point of studying a wealth cycle, is moving your assets from overvalued - to undervalued - not sitting on them for a hundred years.

What I am confident in, is that if for a hundred years you DO move your wealth from overvalued to undervalued - you will destroy Mr Buffett's strategy - probably a hundred fold.

What his assessment completely omits - is timing. Here's the best example I can muster that's been plaguing me for a while.

Last winter, my father in law gave to me the blade tip of an arrow for a bow used for hunting deer. Today, this item would be worth about 45c. I think it is bouncing around the trunk of my car somewhere.

If you were to fast forward to a time or place in the world where purchasing food is impossible (say, extremely high oil prices - so transporting and fertilizing food becomes impractical), but there is wild game around - this exact item might literally be worth an arm and a leg. It would feed my family - something I might even be willing to die for if the timing permitted.

In times in the world where currency becomes useless - gold becomes priceless. Yes it is a 'bump on a log' when it comes to intrinsic value - except in times where currencies die.


interesting, as if Mr. Buffet himself did not have any historical knowledge on the origin of money, surely a possibility but being Mr. Bufet I would run a quick research on what gold represented and would quickly come up with some more reasonable answers. An example would be "the origin of money" by Carl Menger. So clearly he says it with hidden intention of spreading misinformation and playing down this asset class.
any ideas on what mr buffet thinks about central banks? i hear he owns some banks himself so he positioned himself as a dealer of paper money. this at least explains his attitude toward gold

He is right that gold will not produce anything, but as the dollar devalues the gold will still hold its value and can still be traded for goods and services when the dollar eventually tanks due to inflation; especially hyper-inflation if the world economies in Europe, etc tank. Then our dollar becomes worthless and can't buy the daily necessities. Like the Zimbabwe trillion dollar bill that can't even buy a cup of coffee, or even North Korea's dollar that they feel the need to print counterfeit green backs. However, having as many corporations that he has, he makes a good point for having income producing assets that keep income coming in; that type of production he has I would not mind having. This and a 5% share of the Federal Reserve so I can profit each time they say they need to stimulate the economy.

If the currencies we are all forced to use were of sound money [backed by gold, silver, or other commodities which hold value], Buffet's comments would have validity, since it makes sense to put one's wealth to work.

However, all the currencies in the world are fiat, and are actively being debased by the central banks. This is why owning precious metals and other commodities is a hedge against the currency debasement. Further, since people are now discovering this debasement [and the active suppression of the precious metals prices in terms of the fiat currencies], we are in a historical period where these assets not only hold wealth, but increase in true value.

He is right that gold is not producing any cash-flow at all. But what about the waning purchasing power of the currency? What about the ability of store of value Gold posses? He doesn't address these issues candidly.

Yeah it is well known that Mr. Buffet does not play bubbles. No surprise here, he is a value investor.

He doesn't play them, he helps cause them!

He owns Moody's rating and stamped AAA on MBS that he knew were JUNK. This just help escalate the housing bubble.

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