Gold Standard Causes Depressions

[bmichaud]

http://www.huppi.com/kangaroo/L-gold.htm

 

Not only does the gold standard lead to depressions as a result of the inability to create vertical money (see here: http://pragcap.com/the-concept-of-vertical-and-horizontal-money-creation), but it also does not prevent inflation because of fractional reserve banking and horizontal money creation. Even if the gold standard fixes the amount of base money in circulation, that does not stop consumers from borrowing above and beyond their means and bidding up the price of assets, goods and services.

 

See here for why quantitative easing is not money printing: http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event

 

See here for why we are not AT ALL at risk of hyperinflation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

[eclecticvalue]

Most academics believe in neoclassical economics peter. Many are skeptical of MMT.

[bmichaud]

The academics can twist QE into whatever they want it to be. The money supply is being expanded. Call it whatever you want. Jim Rogers and I will continue to call it money printing. And I don't know about you but for me, prices have been going up not down. Tried to ship anything lately? Gone grocery shopping lately? Tried to buy a house in Menlo Park California?

 

PS: Be sure to buy some "Forever" stamps this month before prices go up in January. It's a great investment.

 

 

Prices always and will forever go up in a credit-based economy. A loaf of bread costs about $2.78 now versus $.05 in 1912 - that's 4.1% inflation over a 100-year period. Who cares? Are you not better off now than back then? Can you not trade a stock in about half a second now as oppose to an hour back then?

 

Prices are not skyrocketing out of control by any means across the board. There are pockets of high inflation particularly in the commodity sector as a result of hoarding, institutionalization of commodities as an "asset class", and supply shortages (GMO has a phenomenal paper out on this, see attached).

GMO_Resource_Paper.pdf

[bmichaud]

The academics can twist QE into whatever they want it to be. The money supply is being expanded. Call it whatever you want. Jim Rogers and I will continue to call it money printing. And I don't know about you but for me, prices have been going up not down. Tried to ship anything lately? Gone grocery shopping lately? Tried to buy a house in Menlo Park California?

 

PS: Be sure to buy some "Forever" stamps this month before prices go up in January. It's a great investment.

 

 

Prices always and will forever go up in a credit-based economy. A loaf of bread costs about $2.78 now versus $.05 in 1912 - that's 4.1% inflation over a 100-year period. Who cares? Are you not better off now than back then? Can you not trade a stock in about half a second now as oppose to an hour back then?

 

Prices are not skyrocketing out of control by any means across the board. There are pockets of high inflation particularly in the commodity sector as a result of hoarding, institutionalization of commodities as an "asset class", and supply shortages (GMO has a phenomenal paper out on this, see attached).

 

I think you and  I agree. Prices are rising and as you point out it's a given in our democracy. Prices aren't out of control. But then again, the economy hasn't even begun to start perking yet. My point is that there is no deflation, and this isn't Japan. Greenspan, in his infinite wisdom, fearing deflation back in 1999-2002, is really when the seeds of the current mess were planted.

 

 

Agreed. The asinine interest rate policy you refer to is a somewhat related but largely separate debate, along with government bailouts and the ever-present government put.

[moore_capital54]

 

 

 

Prices always and will forever go up in a credit-based economy. A loaf of bread costs about $2.78 now versus $.05 in 1912 - that's 4.1% inflation over a 100-year period. Who cares? Are you not better off now than back then? Can you not trade a stock in about half a second now as oppose to an hour back then?

 

Prices are not skyrocketing out of control by any means across the board. There are pockets of high inflation particularly in the commodity sector as a result of hoarding, institutionalization of commodities as an "asset class", and supply shortages (GMO has a phenomenal paper out on this, see attached).

 

Bmichaud, with the utmost respect,  is it, naivete, or your age? or a combination of the two that allows you to believe that it's so easy to compound your wealth after tax over time, after taking into the cost of living, at a rate greater than 4.1%..

 

It is my humble opinion, that your argument ends when you essentially say that it is ok for people who actually work for their money see it erode at a rate of 4.1% per annum because we can all trade stocks in half a second...

 

Peter Burke, great comments and responses.

 

I always love seeing these academic papers like the one in this thread that go on to explain why the gold standard caused the great depression while failing to make any mention of unprecedented expansion of credit and paper money (not backed 100% by gold) due to the introduction of fractional reserve banking, amongst many other reasons for the collapse. Its always funny to see the term "hoarding" as well isnt money always being hoarded? Why is it that this term is only used during recessions, even during boom times people are hoarding, by definition money is always being hoarded by someone, somewhere.

 

 

 

 

[bmichaud]

Average salary in 1912 was $1,033 and currently the average salary is around $42,000 - that's a 3.8% CAGR over 100 years. So not only has the average person's salary nearly stayed constant with the price of a loaf of bread, their standard of living has compounded at a FAR greater rate than 4% over that time due to this wonderful economic system we have in the USA.

 

You can argue for the gold standard all you want but it's not coming back. Get over it.

 

You inherited a stash of useless gold from your father back probably in the 70's or roughly 40 years ago - so the rise from $35 per ounce before getting off the gold standard to let's say 1,800 per ounce works out to a 40-year CAGR of 10%. McDonalds on a split-adjusted basis sold for around $1 per share back then, and at its current price of $98, that works out to 12% per annum BEFORE DIVIDENDS. You'd have been better off selling your gold and buying a high quality franchise.

 

Who cares about gold or the gold standard? Buy a wonderful business, accept the system for how it is (there's aboslutely nothing you can do about it) and move on with your life.

[moore_capital54]

Average salary in 1912 was $1,033 and currently the average salary is around $42,000 - that's a 3.8% CAGR over 100 years. So not only has the average person's salary nearly stayed constant with the price of a loaf of bread, their standard of living has compounded at a FAR greater rate than 4% over that time due to this wonderful economic system we have in the USA.

 

You can argue for the gold standard all you want but it's not coming back. Get over it.

 

You inherited a stash of useless gold from your father back probably in the 70's or roughly 40 years ago - so the rise from $35 per ounce before getting off the gold standard to let's say 1,800 per ounce works out to a 40-year CAGR of 10%. McDonalds on a split-adjusted basis sold for around $1 per share back then, and at its current price of $98, that works out to 12% per annum BEFORE DIVIDENDS. You'd have been better off selling your gold and buying a high quality franchise.

 

Who cares about gold or the gold standard? Buy a wonderful business, accept the system for how it is (there's aboslutely nothing you can do about it) and move on with your life.

 

This post was not on your standard at all, you are mixing and matching rhetoric, to form your argument.

 

Lets start with your avg. salary calculation, even in your calculation the average salary has grown at a rate of .3% less than the loaf of bread compounded, but again what you forget to account for is taxes, and the cost of living. The individual earning $1,033, or 43,000 is earning those dollars PRE TAX, post tax he is left with say 75% of that money, which then has to be used to pay for goods and services each and every year. You are making the terrible, or naive mistake of not accounting for the cost of living, each and ever year.

 

Back to that little .3% discrepancy, it amounts to roughly 13% of additional wealth lost, over the same period, so even if we don't adjust for taxes, and cost of living, the loaf of bread compounds way better than an arbitrary metric like "avg. salary", what happens if you are in between jobs? what happens if you get sick ? What happens if you decide to take a year off? Is it fair that your loaf of bread keeps costing more while your money is worth less?

 

Next, lets analyze your Mcdonalds analysis, you choose one of the best performing stocks over the last 40 years, and compare it to what is essentially the money in between all transactions? That is completely unfair as it would mean that an investor would have had to at all times be invested in Mcdonalds common stock from 1971, and pile in any additional income (immediately when receiving it) into Mconalds to achieve the same rate of return as just using gold as a basis for money, (which it historically was). That is a pie in the sky proposition.

 

An average investor would have kept some money in cash some money in bonds and some in equities, of which Mcdonalds may have been one position and Kodak may have been another  (how has Kodak done?) and what about real estate? And what about those loafs of bread that he would have purchased every day or week to feed his family? Well those loaves have been digested and the funds used to buy them gone.

 

I haven't done anything, have just kept my gold bullion sitting exactly where it is, and it has done a better job than all the hindsight investing you claim to have done. And that is what it is supposed to do.

 

Not getting back on the gold standard - NO DOUBT about that, as there are way too many academics in government, who believe that it is ok to subsidize the lack of fiscal discipline, but that doesn't mean I cannot be my own central banker? And work as hard as I can to retain the purchasing power of my assets.

 

Finally, the rhetoric about America and the quality of living, that is just a complete load of bullshit as who are you to say we are any better off in terms of quality of living due to being on a fiat money standard than being on a gold standard. I would argue that there are more people today living the rat race than ever before, having a significant amount of money run through their hands, daily and monthly but not able to save it due to the increasing costs of living and maintaining that ever so incredible "standard of living" you so love.

 

I have posted before the cost of Sears Homes from 1906 to 1971, that was when a house was a home, not an ATM machine or a stimulus tool used by central bankers.

 

 

[moore_capital54]

I would like to add one more thing to provide some perspective.

 

The reason I believe it is so important to account for taxes, and the cost of living, is ultimately we want to have an apples to apples comparison of what 1$ in 19XX is worth in 20XX, and only then can we see if gold has done a good job of retaining its purchasing power.

 

Nobody wants to work forever, and nobody lives forever, also as human beings we are susceptible to disease and accidents, which can hurt our productivity levels. Whenever academics throw numbers and assume that it is a sure thing you would earn x or y, it is often lacking the simple understanding of the process required to obtain such a job, and incorporating the actual standard of living.

 

My argument and that of most older investors who appreciate gold, is that it functions as a store of value with very little effort required on the part of it's holder, and it functions as a major insurance policy if things get out of control.

 

With gold, one does not need to be an amazing stock picker, or a sophisticated tax planner, looking back to 1971, all you had to do was say, well gold might not be good enough for Nixon, but it will be for me. And many people did in fact do that especially here in Canada. Many did that in Germany as well and continue to do so today. We have a client who's bullion position appreciated to nearly 10% of his net worth while it was most probably 2-3% historically.

 

Most importantly, I think it is very dangerous for citizens to simply "trust the system" as academics would like, because the system is clearly rigged to reward the debtors and punish the savers and this is all because of a lack of discipline on the fiscal level...

 

It's your hard-earned after-tax wealth, and it is your job to protect it. Using hindsight to pick the best performing stock (Mcdonald's) is totally ridiculous..as nobody on this board would plow all their after tax wealth consistently into Mcdonalds for the next 40 years...

 

But if you treat gold as it once was (money) and simply acted post 1971 as though it was not demonetized, your cash money would have compounded better than Mcondald's... All while you would have still been free to redeploy into any other asset classes you believed in, such as equities or property, or debt. That sounds pretty good to me.

[bmichaud]

Average salary in 1912 was $1,033 and currently the average salary is around $42,000 - that's a 3.8% CAGR over 100 years. So not only has the average person's salary nearly stayed constant with the price of a loaf of bread, their standard of living has compounded at a FAR greater rate than 4% over that time due to this wonderful economic system we have in the USA.

 

You can argue for the gold standard all you want but it's not coming back. Get over it.

 

You inherited a stash of useless gold from your father back probably in the 70's or roughly 40 years ago - so the rise from $35 per ounce before getting off the gold standard to let's say 1,800 per ounce works out to a 40-year CAGR of 10%. McDonalds on a split-adjusted basis sold for around $1 per share back then, and at its current price of $98, that works out to 12% per annum BEFORE DIVIDENDS. You'd have been better off selling your gold and buying a high quality franchise.

 

Who cares about gold or the gold standard? Buy a wonderful business, accept the system for how it is (there's aboslutely nothing you can do about it) and move on with your life.

 

This post was not on your standard at all, you are mixing and matching rhetoric, to form your argument.

 

Lets start with your avg. salary calculation, even in your calculation the average salary has grown at a rate of .3% less than the loaf of bread compounded, but again what you forget to account for is taxes, and the cost of living. The individual earning $1,033, or 43,000 is earning those dollars PRE TAX, post tax he is left with say 75% of that money, which then has to be used to pay for goods and services each and every year. You are making the terrible, or naive mistake of not accounting for the cost of living, each and ever year.

 

Back to that little .3% discrepancy, it amounts to roughly 13% of additional wealth lost, over the same period, so even if we don't adjust for taxes, and cost of living, the loaf of bread compounds way better than an arbitrary metric like "avg. salary", what happens if you are in between jobs? what happens if you get sick ? What happens if you decide to take a year off? Is it fair that your loaf of bread keeps costing more while your money is worth less?

 

Next, lets analyze your Mcdonalds analysis, you choose one of the best performing stocks over the last 40 years, and compare it to what is essentially the money in between all transactions? That is completely unfair as it would mean that an investor would have had to at all times be invested in Mcdonalds common stock from 1971, and pile in any additional income (immediately when receiving it) into Mconalds to achieve the same rate of return as just using gold as a basis for money, (which it historically was). That is a pie in the sky proposition.

 

An average investor would have kept some money in cash some money in bonds and some in equities, of which Mcdonalds may have been one position and Kodak may have been another  (how has Kodak done?) and what about real estate? And what about those loafs of bread that he would have purchased every day or week to feed his family? Well those loaves have been digested and the funds used to buy them gone.

 

I haven't done anything, have just kept my gold bullion sitting exactly where it is, and it has done a better job than all the hindsight investing you claim to have done. And that is what it is supposed to do.

 

Not getting back on the gold standard - NO DOUBT about that, as there are way too many academics in government, who believe that it is ok to subsidize the lack of fiscal discipline, but that doesn't mean I cannot be my own central banker? And work as hard as I can to retain the purchasing power of my assets.

 

Finally, the rhetoric about America and the quality of living, that is just a complete load of bullshit as who are you to say we are any better off in terms of quality of living due to being on a fiat money standard than being on a gold standard. I would argue that there are more people today living the rat race than ever before, having a significant amount of money run through their hands, daily and monthly but not able to save it due to the increasing costs of living and maintaining that ever so incredible "standard of living" you so love.

 

I have posted before the cost of Sears Homes from 1906 to 1971, that was when a house was a home, not an ATM machine or a stimulus tool used by central bankers.

 

 

Assuming a constant tax rate, the after-tax coverage of the cost of bread stays the same. So if the cost of bread is $100 and you after-tax salary is $1,000, then your bread cost coverage is 10x - if your nominal salary doubles along with the nominal price of bread, then you after-tax salary still covers the cost of bread 2x. Very basic math. My example used 4% inflation for the cost of bread - it's pretty well documented that the long-run historical rate of inflation is around 3%.....

 

RE using MCD as an example...you know exactly what i'm talking about - i'm saying you would have been better off putting your gold hoard into MCD versus gold at that time (nothing to do with putting money into MCD versus gold every year thenceforth). I could have used any great company - MCD, DE, CAT, XOM. I don't have the time or patience to look up the actual CAGRs for those companies, but I'd put money on it you would have been better off rather than keeping the gold. 

 

Even people "running the rat race" right now are running that race while enjoying iPads, iPhones, super fast broadband, fuel-efficient cars, higher quality food, etc... etc....

 

NOBODY should be complaining about what we have here in North America. I'm not better than anyone else, and I've had the opportunity to double my earning power in less than two years just by working my butt off. What do I care about what the cost of bread is doing? I know with reasonable certainty my nominal earning power is going to keep up with the nominal growth of my cost of living (as WEB says, your best hedge against inflation is your own earning power!!) and most importantly I have all the opportunity in the world to not only achieve the American dream but go above and beyond that based on the skill set I develop and how hard I work.

 

What does the gold standard or arguing over 1.5% inflation versus the historical 3% inflation have to do with that or anything?

[petec]

Moore, you are right that choosing MCD as a comparison is a case of hindsight investing.  But so is choosing today's gold price as representative of the value of gold.  Gold *might* be in an almighty bubble.  The 1999 price *might* be equally representative, and at that point even Kodak had performed better, at least from 1974 which is the furthest back that I have data.  (I don't believe 1999 is representative, but you get the point.)

 

My view is that whether it should or not, gold will likely maintain its purchasing power over long periods of time.  That's not a bad result.  But great businesses, few and far between though they are, have a record of increasing their purchasing power over time.  Surely that's a better result?

 

More controversially I'd also argue that disciplined investors can add to the return on stocks by buying below intrinsic value, whereas intrinsic value is hard to calculate for gold and buy/sell decisions have largely to be based on macro analysis, and we all know how hard that is. 

 

For me it is a total no-brainer, especially after the run gold has had.  But then my father used to say that the term 'no-brainer', logically, ought to refer a decision taken by a person with no brain.  Time will tell!    ;)

 

[bmichaud]

Picking MCD is merely representative of a great company. Pick XOM, Geico, KO, PG, DE, CAT - any one of those would outperform. No hindsight bias, simply common sense about what companies will be around forever.

[alwaysinvert]

Picking MCD is merely representative of a great company. Pick XOM, Geico, KO, PG, DE, CAT - any one of those would outperform. No hindsight bias, simply common sense about what companies will be around forever.

Right, so how many people bought those stocks 40 years ago and held?

 

Even Buffett, the best of all time, wasn't able to hold on to GEICO and Disney for all that time, so why would we posit that an individual part-time investor could find some of the most outstanding companies of the century, deploy all their networth in them and be able to hold for 40 years? If that isn't hindsight bias, nothing is.

 

[petec]

Why would we posit that anyone would find it easier to hold gold for 40 years than a truly top class stock like KO?

[bmichaud]

Picking MCD is merely representative of a great company. Pick XOM, Geico, KO, PG, DE, CAT - any one of those would outperform. No hindsight bias, simply common sense about what companies will be around forever.

Right, so how many people bought those stocks 40 years ago and held?

 

Even Buffett, the best of all time, wasn't able to hold on to GEICO and Disney for all that time, so why would we posit that an individual part-time investor could find some of the most outstanding companies of the century, deploy all their networth in them and be able to hold for 40 years? If that isn't hindsight bias, nothing is.

 

 

This is what I said:

 

You inherited a stash of useless gold from your father back probably in the 70's or roughly 40 years ago - so the rise from $35 per ounce before getting off the gold standard to let's say 1,800 per ounce works out to a 40-year CAGR of 10%. McDonalds on a split-adjusted basis sold for around $1 per share back then, and at its current price of $98, that works out to 12% per annum BEFORE DIVIDENDS. You'd have been better off selling your gold and buying a high quality franchise.

 

To borrow a commonly-used phrase lately, you're missing the forest from the trees. I was merely demonstrating the folly of owning a useless pile of gold versus buying a good company. So let's say Moore wants to pass along his still useless stash of gold to his kids right now - 40 years from now I would guarantee you his kids will be better off if they sell the gold and buy an obviously durable business such as KO, PEP, MCD, XOM, DE, or CAT.

 

So going back to your comment:

so why would we posit that an individual part-time investor could find some of the most outstanding companies of the century, deploy all their networth in them and be able to hold for 40 years

 

I'm not positing this at all. Moore didn't posit it either. Very simply, if an investor has a current position in gold, they will be better off over time swapping that gold for a high quality business. At the very least, a "part-time investor" should be buying a market index versus gold - a part-time investor has no business attempting to make a call on the long-run value of gold because there is no reliable method for determining an appropriate starting point.

 

My original example gave Moore the benefit of the doubt, comparing MCD at $1 to gold at $35. If he inherited the gold when it was at $500 an ounce, my point is even more emphatic.

[SmallCap]

With gold, one does not need to be an amazing stock picker, or a sophisticated tax planner, looking back to 1971, all you had to do was say, well gold might not be good enough for Nixon, but it will be for me.

 

I would argue that with Gold you need to be an amazing market timer. it is easy talking about this the way you do when Gold has had an amazing run in the last 5 years. But what if you bought Gold because it is the best store of value in 1980, you are just getting back to even now. From 1980-2005 (going from memory, didn't look it up) how did it do as a store of value? that period makes the lost decade in stocks look rosy.

 

I can't see buying Gold right now as anything more then working on the greater fool principle and hoping that fear will drive someone else to pay me more for it in the future.

 

If someone can tell me the value (not the current price) of an ounce of Gold and back it up with some good logic then we can have a discussion of the merits of holding Gold.

[tooskinneejs]

Smallcap said: "If someone can tell me the value (not the current price) of an ounce of Gold and back it up with some good logic ..."

 

Smallcap, I hope for your sake that you aren't holding your breath right now.

[alwaysinvert]

At the very least, a "part-time investor" should be buying a market index versus gold - a part-time investor has no business attempting to make a call on the long-run value of gold because there is no reliable method for determining an appropriate starting point.

I agree with that if the choice is either or. And I agree that it is folly for one to hold gold instead of stocks, generally - if you know what you are doing (that is indexing or have real skill). If you don't, I'm not sure the answer is as clear-cut.

Why would we posit that anyone would find it easier to hold gold for 40 years than a truly top class stock like KO?

I think you will find that there actually are quite a few people who have been hoarding gold for 40 years plus, sometimes without even realizing it. Considerably more people than those who bought MCD or even a mutual fund 40 years ago and held. And considering the average investor has a markedly lower return than the market averages over that time, they haven't been doing too shabby compared to the best somewhat probable alternative (which in my mind is a closet-index fund with 1-1.5% fee).

 

My parents found out after a burglary that their jewellery gold was worth tens of thousands, and they are middle-class public sector workers so that is real money for them. I don't think they are unique in that sense.

[moore_capital54]

Why would we posit that anyone would find it easier to hold gold for 40 years than a truly top class stock like KO?

 

Because gold was historically money, and can be viewed as an alternative currency. Gold should not be viewed as an investment, rather an alternative currency.

 

 

[petec]

That's how I view my KO :)

[returnonmycapital]

Smallcap said: "If someone can tell me the value (not the current price) of an ounce of Gold and back it up with some good logic ..."

 

Smallcap, I hope for your sake that you aren't holding your breath right now.

 

 

I'll take a stab at it. From a business perspective, which is the only one I believe to be rational, gold is worth its marginal cost to market plus a pre-tax margin.

 

Currently, from my gold mining sources, the world average cost to market for gold is around USD 500 per ounce (which is higher than I was told). Tack on a pre-tax margin of 10-15% and, voila, gold is worth about USD 550 - 575 per ounce.

 

Anyone paying over that is either not rational or has proof that the cost to market is higher.

 

The problem today is that money has no value (short-term cash rates are negative on a real basis). That puts pressure on the demand for gold, which supposedly holds its real value over time. The supply being reasonably fixed, the price shoots up. Once the Fed shows a tightening bias, as long as it is not too far behind the inflation curve, gold will revert toward its business value.

 

The time to buy gold for rational investors (big lines or not) is when its price is below its business value, not above. 

 

But I would just skip all that and buy the large caps that will be around for a good long time. All mentioned in prior posts and almost all offering good value. And compared to gold, excellent relative value.

[HJ]

Smallcap said: "If someone can tell me the value (not the current price) of an ounce of Gold and back it up with some good logic ..."

 

Smallcap, I hope for your sake that you aren't holding your breath right now.

 

 

I'll take a stab at it. From a business perspective, which is the only one I believe to be rational, gold is worth its marginal cost to market plus a pre-tax margin.

 

Currently, from my gold mining sources, the world average cost to market for gold is around USD 500 per ounce (which is higher than I was told). Tack on a pre-tax margin of 10-15% and, voila, gold is worth about USD 550 - 575 per ounce.

 

Anyone paying over that is either not rational or has proof that the cost to market is higher.

 

The problem today is that money has no value (short-term cash rates are negative on a real basis). That puts pressure on the demand for gold, which supposedly holds its real value over time. The supply being reasonably fixed, the price shoots up. Once the Fed shows a tightening bias, as long as it is not too far behind the inflation curve, gold will revert toward its business value.

 

The time to buy gold for rational investors (big lines or not) is when its price is below its business value, not above. 

 

But I would just skip all that and buy the large caps that will be around for a good long time. All mentioned in prior posts and almost all offering good value. And compared to gold, excellent relative value.

 

How much does it take to reproduce a dollar bill?  Or maybe a more relevant question is "What would it take to make the Fed do QE?" (QE1 was quite difficult, but QE2 felt way too easy). 

 

For thousands of years, gold periodically comes into human society as money, and then goes out and gets replaced with something else, but that something else always goes away while gold always came back.  US Dollar being the most recent "something else".  What gives gold its perceived value is mass psychology, much as the faith in US Dollar.  Its psychological value is magnitudes greater than the production cost.  The current US social / economic / military dominance in the world is what gives faith in the US Dollar.  When that's in doubt, gold or whatever the "counter dollar" at the moment is, goes up in relation. 

 

We maybe at one of those historical inflection points as it relates to the dominance of one particular social/economic organization and its related moral / economic values, but I for one am a believer in US exceptionalism, at least for the duration of my trip on this earth.

 

Nobody alive has ever needed to question that belief in their investment decision until this crisis.  The fact that it's something that's being questioned now just shows the magnitude of this earth quake. 

[bmichaud]

it's odd that someone is advocating buying and holding great companies for decades---a good plan btw; but then is essentially waiting for Godot---before buying them. And yet the master of this technique, Warren Buffett is emptying his wallet at "current" prices. And he, on behalf of BH, has the smallest universe of investments from which to choose. Certainly far smaller than anybody on this board evaluates.

 

I'm assuming you're talking about me....

 

As I've stated ad nauseum, back when WEB ran BPL, while he was buying 50-cent dollars he was hedging a portion of his portfolio against general market declines by investing in workouts and private businesses. When he was buying American Express, categorized under "Generals - Relatively Undervalued", he was also hedging out MARKET RISK by shorting a like business selling for a higher multiple. Why would he hedge out market risk if he's just buying a good business. Why? Why? Why?

 

Here is a quote from him in his 1962 letter:

The generals tend to behave market-wise very much in sympathy with the Dow. Just because something is cheap does not mean it is not going to go down. During abrupt downward movements in the market, this segment may very well go down percentage-wise just as much as the Dow.....It is, of course, also the most vulnerable in a declining market.

 

Buffett is buying hand over fist, yet he is continually generating cash from sources outside of his investments. He has a continual natural hedge. Buffett buying securities behind a corporate veil is not as relevant to managing a fixed amount of capital as is his management style during his hedge fund days.

 

Yes, yes, you will say that he never intentionally hedged his portfolio, he just continued to buy securities until he couldn't find any then he moved on to workouts. Obviously you have some keen insight into Buffett's thinking back then....anyway you could share how you know that considering he wrote the EXACT opposite in his letters? I'd love to know.

[bmichaud]

where does it say in the letters he was shorting stocks as a hedge? Can you link to it please? I missed that part and would love to be enlightened.

 

 

Read any of his descriptions on "generals - relatively undervalued" - it's frickin pairs trading. How can you implement a pairs trade without shorting something?

 

Take a run through his letters and let me know why he invested in workouts and private companies when he could find net-nets.

[beerbaron]

Peter, go easy on the guy he made an honest assumption. He just forgot to mention it was an assumption.

 

On the subject of Buffett shorting stocks. I have not found any statement ever mentionning him shorting anything. Francis Zhou in one of it's interview mentions Buffet made a short in the 50's and almost lost it's shirt, but I could never find the concrete data about it.

 

BeerBaron

[bmichaud]

where does it say in the letters he was shorting stocks as a hedge? Can you link to it please? I missed that part and would love to be enlightened.

 

 

Read any of his descriptions on "generals - relatively undervalued" - it's frickin pairs trading. How can you implement a pairs trade without shorting something?

 

Take a run through his letters and let me know why he invested in workouts and private companies when he could find net-nets.

 

So you are making it up? where does it say he hedged his portfolio by selling stocks short? where does it say he did pairs trading? is that your proof? that one passage you quoted? if so you are doing nothing but projecting and wishful thinking that Buffett is some kind of market timer.

 

Where does he say he shorted stocks as a hedge against his longs? I've read his letters. Selling short is not the same as investing in workouts. If you can't produce the quote then I suggest you quit spreading useless mis information as if it were fact.

 

 

Aye aye captain Burke.