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Warren Buffett makes a big bet on gold

  
  Analysis
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Buffett bought a stake in miner Barrick Gold

Barrick Gold Warren Buffett
Warren Buffett has famously disparaged gold but evidently he’s had a change of heart.
According to a Q2 13F filed today, The Oracle of Omaha added 20.9 million shares of Barrick Gold, which is the world’s second largest gold miner. He paid $563.5 million for the stake, which equates to $26.95 per share and his Berkshire Hathaway owns 1.2% of the company. It was the only new company he bought in the second quarter.
The shares closed at $26.99 on Friday but jumped about $1.00 in after hours trading.
Warren Buffett
This could indicate a massive change of heart from the world’s most famous investor, or one of his deputies.
His most-famous musing on gold was from back in 1998:
“(Gold) gets dug out of the ground in Africa, or someplace. 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.”
As recently as 2018 he repeated his misgivings about gold.
“The magical metal was no match for the American mettle,” he wrote in his annual letter while comparing the returns of both since he first invested in stocks in 1944.
Now this doesn’t necessarily mean he has a new view on gold. Barrick’s cash flows with gold steady at these levels are compelling (and other miners are even more compelling).  Still, expect much more interest in the space now that Warren Buffett has given it his blessing.
Other highlights from his Q2 13F:
  • Exited Occidental Petroleum, but added to Suncor Energy
  • Cut JPMorgan stake by 62%
  • Cut Mastercard stake by 7%
  • Aside from SU, only added to STOR and KR
  • Reduced WFC, SIRI, PNC, MTB, BK
  • Exited DAL, LUV, UAL, AAL, QSR, GS, OXY
In terms of the ones he reduced. In general Buffett doesn’t sell shares unless he plans to sell out. However at times he has to sell to stay below ownership limits.
Overall, his investment mix doesn’t exactly show confidence in the economic or stock market recovery.

Mystery bidder offers $3,456,789 for lunch with Warren Buffett (Rs 22 crore 81 lakh 48 Thousands )

  
Analysis, Education
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The cost of the average restaurant meal has risen 2.7 per cent in the past year, according to the US Bureau of Labor Statistics, but if that looks steep against an economy wide inflation rate of 1.1 per cent, it is nothing compared to the rising cost of lunching with Warren Buffett.

An anonymous bidder has paid $3,456,789 for a lunch date with the investment guru and founder of Berkshire Hathaway, some 47 per cent more than the winner of the charity auction last year.

Mr Buffett will meet the winning bidder and up to seven friends for an intimate meal, in what has become an annual tradition that has netted more than $23m in total for the San Francisco charity, Glide.

Mr Buffett’s late wife Susan used to be a volunteer at Glide, which offers meals, medical testing and other services to homeless and low-income people in the San Francisco’s Tenderloin district. Volunteers and supporters sang and cheered as the five-day auction moved into its final minutes on Friday night, and a late bid swelled the proceeds from $2.8m, where bidding had hovered for most of the day, to a final total that matched the all-time record from 2012. (more…)

50 Shades of Warren Buffett

  
Analysis, Education
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I am about to embark on my 11th annual trip to Warren Buffett’s Omaha. This year I have something unique to share with you: an excerpt from a chapter I contributed to a brand new book, The Warren Buffett Shareholder. Let me tell you a little bit how this chapter came about.

In the early 2000s I taught graduate investment classes at the University of Colorado. As a class assignment I had students do presentations on Warren Buffett’s annual letters to his shareholders. We broke up 30-some years of Buffett letters into six time periods and divided the class into six groups. Each group had to present the most important lessons they learned from Buffett’s letters.

The day of presentations was not my finest moment as a teacher. It started out great, but soon all the presentations started to sound the same. Here is why: Buffett’s letters are full of wisdom, and each letter has a new insight or two. But value investing philosophy rules (just like the Ten Commandments in the Bible) are the same now as they were 50 years ago. Buffett simply adds a new shade of grey onto the same wisdom in each letter. Here is the thing with shades: You see them only as shades next to other shades, not as colors in their own right.

Then I discovered that Lawrence Cunningham had edited Buffett’s letters into a book, 50 Shades of Warren Buffett. Okay, the actual name of the book was The Essays of Warren Buffett. When people ask me for the one book they should read about Warren Buffett, my answer is always The Essays of Warren Buffett – it’s as close to an autobiography of Buffett as you’ll get.

(By the way, if you haven’t read “The Six Commandments of Value Investing” – an excerpt from my next book – you can sign up here to read it. I’ve been asked, why six, not ten? My deeply Talmudic answer is, “Value investing is about quality not quantity.”) (more…)

How Does Buffett Make So Much Money? Not How You Think!

  
Analysis, Education
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Excerpt:

Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other stock or mutual fund with a history of more than 30 years, and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management. These results have broad implications for market efficiency and the implementability of academic factors.

Buffett’s record is remarkable in many ways, but just how spectacular has the performance of Berkshire Hathaway been compared to other stocks or mutual funds? Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Buffett has a higher Sharpe ratio than all U.S. mutual funds that have been around for more than 30 years.

We document how Buffett’s performance is outstanding as the best among all stocks and mutual funds that have existed for at least 30 years. Nevertheless, his Sharpe ratio of 0.76 might be lower than many investors imagine. While optimistic asset managers often claim to be able to achieve Sharpe ratios above 1 or 2, long-term investors might do well by setting a realistic performance goal and bracing themselves for the tough periods that even Buffett has experienced.

In essence, we find that the secret to Buffett’s success is his preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large absolute and relative drawdowns this entails. Indeed, we find that stocks with the characteristics favored by Buffett have done well in general, that Buffett applies about 1.6-to-1 leverage financed partly using insurance float with a low financing rate, and that leveraging safe stocks can largely explain Buffett’s performance.

 
Source: Andrea Frazzini, David Kabiller and Lasse H. Pedersen, “Buffett’s Alpha.”

Index Investing Unmasked: 96% Of Stocks Are Garbage

  
Analysis, Education
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Warren Buffett released his annual letter over the weekend, in which he praised Jack Bogle as his “hero” for promoting index investing. The irony is that investors would have been better off buying Berkshire shares. Over the last 10 years, Berkshire stock is up 139% while the S&P 500 is up 71%. The real question is why Buffett just doesn’t tout his own stock rather than promote index investing. He tries to explain himself:

 “Charlie and I prefer to see Berkshire shares sell in a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price – it’s no fun having owners who are disappointed with their purchases – nor one too low.”

Buffett is doing something every skilled salesman does: managing expectations. Buffett’s own performance is compared against the S&P 500, and what better way to win that game than by putting a floor under the Berkshire price with the promise of share buybacks and then putting a ceiling on the stock by promoting index investing? The real secret is Buffett is talking his book by not talking it: Rather than tell investors to buy Berkshire at any price, he tells people to invest passively through an index, which leads to the very market inefficiencies that he profits from.

The great appeal of index investing is its low fees, but like buying a cheap pair of shoes that falls apart after 6 months, investors will find that index investing is the most expensive thing they ever did. Vanguard promotes its rock bottom expense ratios, but what is not published is market impact costs that are incurred when the fund rebalances. Since these rebalances are often announced ahead of time, they are extremely vulnerable to front running. Christophe Bernard, PhD Senior Scientist at Winton Capital Management, estimates that front running costs index investors 0.20% per year. That’s 4 times the official expense ratio of Vanguard’s S&P 500 ETF.

In his latest research, finance professor Hendrik Bessembinder discovered that 58% of stocks don’t even outperform a Treasury bill. This study was based on 26,000 stocks from 1926 to 2015. Just 4% of stocks accounted for all of the $31.8 trillion in gains during this period. That means 96% of stocks were complete garbage. Even worse, shares of unprofitable companies outperform their profitable counterparts, which is why you have a marketplace that is dominated by Twitters and Teslas.

Index investing means buying a box of garbage stocks sprinkled with a few hope and glamour stocks whose price gains are solely a result of underperforming fund managers grasping for quarterly bonuses and retail investors juicing up their portfolios in a doomed attempt to catch up on their retirement targets.

While mom and pop buy a Vanguard index with their $500,000 and get front run all day by proprietary traders, the capitalist televangelist Warren Buffett will continue to actively trade billions while preaching the miracle of buy and hold investing.

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