Friday, September 21, 2012
Oh, Warren Buffett
Finally finished the hefty 710-pages biography of Warren Buffett. Didn't quite like him at first but I thought it would be good to read up about him. A great personality with great passion, drive and focus. One can only dream to be 10% as hard-working as he is. I gained more respect for him as a person after reading the book. However, it's unfortunate that his calls for the 2008 $700 billion bailout of failed financial firms and his distaste towards gold will be his biggest mistakes in the later part of his life. The worst thing is that many people who look up to him will be affected following these 2 advices. I've seen videos of congressmen quoting him so that they can push their bailout and spending agendas. It's not easy to have such great power I guess.
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I wrote one comment that was most likely 1000-1500 words and I forgot to log in, deleting all of my writings. I am sorry if my following summary of what I wrote prior is vague or underdeveloped. If their are any questions, feel free to ask and i will gladly expand on the unclear ideas. Gold is a speculative buy based on the collective mindset of the investing body. Warren Buffett is a value investor, meaning he tries to find stocks that are priced lower than their current intrinsic value. I understand the principles behind hedging ones account against inflation, but Buffett does not find gold to be worth anything as I believe you should too. As soon as speculative investments are made, one's gains are taken out of their hands and put into the hands of the changing market tides. Now on government bailouts; I believe the government should have been more frugal with their bailout funding, but I find bailouts to be a better strategy than letting the large business fail. I am not sure if you have looked at the list of banks who received no federal aid, but the names are not noteworthy. They certainly do not have the infrastructure or monetary capability to take on the roles of JP Morgan and Chase, Goldman Sachs, Morgan Stanley, or Wells Fargo. I understand your conservative roots in investing and economics, I grew up with them myself. I studied it in my economic courses and I applied it in my socio-economic philosophies and investments for a while. But after much reading and studying, I have taken steps away from Austrian Economics, not because the statements are unsound, but the mathematics in support are. I encourage you to look at Keynes and Friedman in their mathematical endeavors and the economic stance they took after quantifying as much as possible.
ReplyDeleteIf you want to understand my investing or economic philosophy, the following is a list of books that have influenced me greatly:
"Margin of Safety" Seth Klarman
"The Most Important Thing" Howard Marks
"The Essays of Warren Buffett: Lessons for Corporate America" Warren Buffett
"Security Analysis" Benjamin Graham
"The Intelligent Investor" Benjamin Graham
"Statistics and Date Analysis for Financial Engineering" David Rupert
"Fooled by Randomness" Nassim Taleb
"The Black Swan" Nassim Taleb
"Beating the Street" Peter Lynch
There are many more that I enjoy, but these most accurately encompass my views. I do not mean to disrespect your views, many great men hold them. But I think it is important for all of our views to be challenged at a fundamental level at some point.
I don't think one should dismiss gold as a speculative asset so easily. Throughout history, people have gone back to it whenever there's massive inflation. One may or may not like gold for whatever reasons, but the world is moving back to it, at least for the foreseeable future. Do check out this link
ReplyDeletehttp://silvernjin.blogspot.sg/2012/10/warren-buffet-wrong-on-gold-wiped-by_16.html
Here I showed how much purchasing power warren buffett has lost in the past 12 years. And if one is still not convinced, check out this too:
http://silvernjin.blogspot.sg/2012/10/blog-post.html
Austrian Economics do not try to go too deep into quantifying things. Economics is a social science. You cannot fit every single human's thoughts or actions into mere equations. That is where Keynes has failed so badly. The world has been on Keynesianism for a century, and look where it has gotten us to. The debt crises we see around the world today are totally predictable and are caused by keynesianism, as the Austrians have pointed out long ago.
I've read some of the books that you suggested,and I agree they are great books. I would also like to suggest this:
Peter Schiff's "How and Economy Grows and Why it Crashes".
I welcome debates and discussions. I'm pleased that you are so polite. Many people I debated with just resort to calling me names when they couldn't come up with counter-points. Thanks for dropping by!
As for the bailouts, it is not the end of the world when banks fail. Banks have failed for as long as banks exist. The prudent banks will come in and take over the assets of the failed banks, and start again from a sounder foundation.
ReplyDeleteI read your article on Buffett's lost purchasing power due to his lack of holdings in gold. The problem I find with what you are saying is simply, you are looking in hindsight. Most who makes money from buying gold assumes they understand the gold markets, and evidence can be compelling. But in hindsight, confidence is easy and seems warranted. I prefer looking at my stock purchases form a bottom up approach. You made a statement in you comment above that I would like to evaluate for a few line:
ReplyDelete"Austrian Economics do not try to go too deep into quantifying things. Economics is a social science. You cannot fit every single human's thoughts or actions into mere equations."
I do agree with this to some extent and I do not know your backing in statistics, but I would suggest that societal uncertainties should be adjusted with "Confidence Intervals". These intervals allow for a margin of error to be stated and potentially accurate results come shortly afterwards. The habit of understating knowledge or statistics allows confidence to increase in statements, increasing the accuracy of statements made. As a brief example, I just wrote a Financial Report for National Oilwell Varco (Ticker: NOV). When evaluating the current intrinsic value (using DCF), I put S&P expected annual earnings at 11.6%, well beyond the average expected earnings. Due to this overstatement though, I currently can say with a strong level of confidence that I believe NOV to be worth at least $86.85 per share. Many analyst make claims at $96 and above, but I can introduce my interpretation with near certainty. Although these alternate valuations are valid, my valuation clearly holds a much higher probability of falling under the intrinsic value. (By the way, you should look at buying NOV, it is a great stock destined to benefit from volatility in the oil market). But I do agree with the idea that we can not quantify all human thought and emotion, but we can quantify that we do not know, allowing us to accurately understand the value of the information we currently hold.
Back to gold for a brief moment. I agree with your statements; gold holds historical value and appears to be a fairly secure purchase, especially in times bordering nearly certain mass inflation. I also understand the typical Austrian economics market approach. The idea that proper understanding of "good business", strong financial fundamental, a lack of government interaction, and a little bit of luck making a good stock is a view that choose to reject. (I understand the misstatements I made, I find them rather humorous though and I am sure you understand where the blanket statement comes from). Austrian Economist have a natural love affair with gold because it revolts against government control in the economy; the very bane of their existence. But it is important not to get "married to an idea".
ReplyDeleteI am not sure if you have read "The Black Swan" by Nassim Taleb, (If you have not, I HIGHLY recommend it) but I now call upon the premise of "The Black Swan" in an argument against speculative investing and speculation based science. For a long time, hundreds of years in fact, swans were considered exclusively white. This theory was seemingly verified by a series of correlated findings and an absolute lack of evidence to the contrary. This remained until the discovery of Australia. Once biologist began to study the animal life in such a new land, the "black swan" was discovered, crashing all theories formed around all swans being white. But this same principle applies to what I understand your theory on gold prices to be. Chances are, you are right, but there is a chance that you are wrong, and with gold sitting consistently around 1600 oz. losses have potential to hold detrimental impact on your financial situation.
In response to your ideas on Keynesian Economics, any form of economic condition would have struggled under such intensive crisis. Now I know you think that Keynesian economics pushed America over edge, and this may be so, but due to government encouragement of large scale business growth, we were able to see the U.S. market grow exponentially for years; achieving unprecedented market growth. This growth would not have occurred at such a pace under Austrian Economics. This idea is flawed as well. Austrian Economist, as I am sure you are aware, let businesses operate nearly without restriction and this lack of regulation causes mass fluctuation in the market place. When it gets down to it, I can not let myself sit by and do nothing as the bottom of the world falls out and Austrian Economist sit by and wait for the world to finish burning. This comment also works as a gate way to Bailouts.
I am tired and I have a test tomorrow so I am going to leave it at that but I look forward to hearing your opinions.
We're not looking back with hindsight. The investors I follow started buying gold in 1999, at the start of the bull run.
ReplyDeleteNeither am I "married to an idea" like using gold as money. I've said that whether one like or dislike gold for whatever reasons, the world is moving back to it, at least for the foreseeable future.
If you look back at history, people alternated between virtual money, hard money and government fiat money. Right now I just happen to think that the world will move towards hard money. And Warren should recognise that.
I've read the Black Swan, if you click on the "books" link on the top right corner of the blog.
Regarding growth, unfortunately all that has grown in the past 12 years is debt. People borrowed too much money and no one is saving, because the Fed set the rate too low. People then spend all those borrowed money on consumer goods, giving the illusion of growth. When interest rates inevitably rise again, all those bad debts are going to be exposed. This is why I said in the youtube comment that spending doesn't grow the economy. It's an illusion.
For an austrian economist, the market is the best regulation. If a business does something wrong and unsound, then the consumers punish it by making it go bankrupt. Sounder company will come in and gain market shares. That's how it is supposed to work.
The Austrians predicted all these crisis, and gave the reasons why they will happen and why there's no avoidance. Then when the crisis struck, they try to present their ideas to people again, but get accused of wanting to do nothing and letting the world burn. The problems are not created by them. They're messengers who're trying to clean up the mess.
Good luck for your test =)
I'm ok with Warren not investing with gold. What I'm unhappy with is that too many people followed his advice without question... Sad to say, he has been the cheerleader for the US economy for the past 5 years. And he publicly said Ben Bernanke is great.
ReplyDeleteI notice that you are studying in the University of Alabama. Am I right to say that you are from Alabama? There's one great investor from there, and his name is Jim Rogers.
ReplyDeleteGold fundamentally is the definition of "self fulfilling prophecy". It holds no intrinsic value and only trades for what the collective average of buyers balance it out at. Clearly though, we fundamentally differ in gold opinions, so I will leave my gold statement with this; I strongly encourage you to evaluate your reason for buying stocks, then look at gold. I certainly hope you do not buy stocks out of a history book, so why should your catalyst be exclusively historically based? This is it for my opinion on gold for the time being. (If you want to rebut my ideas or introduce new material, feel free to bring the topic up at anytime)
ReplyDeleteNow unto the topic of Austrian Economics: It seems to me that you are under the illusion (and correct me if I am wrong) that volatility can be avoided in the market place under so-called "market law". It is nearly impossible to expunge most volatility from a progressive market due to the innovative nature of business. Progress will be made, shares will be sold, shares will be purchased, greed will take place, markets will shift. This is the general cycle that will take place without "government interference". Your statement, "That's how it is supposed to work." is concreting your opinion with evidence (although I understand the purpose and statement). All market types are doomed to cyclical behavior and market bubbles and depressions are a natural result of such patterns. (take into account the dutch tulip bubble, which, if memory serves me right, was not induced by government) Neither system is without its flaws, but I personally take strong stances in "earth preservation" if you will. I consider myself no hippy, but in order for the longevity of progress, I push for alternative energy research funded by our government and regulation of energy companies in particular. This research would not occur as often with government funding. Our world is not only about money, money is just a driving force to power (which is great), but I see Austrian Economics losing sight of long term progress in order to eliminate short term competition. I am running out of words so I will leave this idea here for now.
Quick on your second to last and last statement, I agree with your comment on blind following. Regardless of the brilliance of the individual or concept, blind following is ignorant and ultimately detrimental to society. So we are good there I think.
I currently am at the University of Alabama and I am from Birmingham, Alabama. Jim Rodgers is scheduled, I believe, to speak near the end of this semester here and I plan to be there. Would you like a recording or video of the lecture? Also another famous investor who attend the University of Alabama for a brief time is Bernie Madoff, whose investment strategies I admire deeply. (sarcasm if not noted)
Where do you hold a degree or are you pursuing a degree (if you do)? What is your career? Career goal? Current top 5 Market Picks? Thats about it for now I think.
ReplyDeleteOver the years I've found it hard to convince people of the place of gold in humanity. So I'll just leave it at this (and as i've repeated earlier): No matter what your thoughts on gold are, and what the market should or should not be doing, we have to invest based on what the market will move into. I think there is no point for us to argue on about whether gold has intrinsic value, but let's just look from the market's perspective.
ReplyDeleteIn the case of gold, if you can convince me that the market will increase its faith in paper money, that there will be less and less currency turmoil, less debt crisis, less money printing, way higher interest rates, central banks are dumping gold, and supply of gold outstripping the demand of gold, then yes, I will probably sell my gold. But right now there is really no fundamental reason to say that gold will not continue to go up, other than "gold has no intrinsic value".
I consider my self a value investor/ contrarian investor. According to investopedia.com value investing is defined as,
Delete"The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated."
Fundamentally, you saying that "But right now there is really no fundamental reason to say that gold will not continue to go up, other than "gold has no intrinsic value"." makes gold ineligible has a purchase under my philosophy.
But I do watch gold and if you want a possible great gold play, look at NovaGold (NG). It is a little bit speculative, but after looking at tangible and intangible assets, foreclosure risk and value, and potential gains on the untapped Donlin Creek Gold Reserves. I like almost everything about NG. They have highly experienced and successful management, 50% ownership of the world's largest untapped gold reserves, strong partnerships with on the property with Barrick Gold (who has tried to acquire them in the past, putting NOV in the target for a likely second attempt), Minimal risk of losses (foreclosure value sits 8% lower or so from the last valuation I saw), and revenues breach 33B over the next 20 years for NG according to the most modest estimation of gold available. This does not include other precious metals and basic materials that inevitably will be found. It is at least worth looking at. Looking forward to seeing what you think. (doesn't fit my philosophy yet so I do not own)
Well, then you have missed out on a 540% gain by gold since the year 2000 =) But of course, everyone has their own ways of investing.
DeleteFor now, I am not looking at stocks though, because it is more risky than the commodity itself. Studies show that commodities itself outperform their stocks in a commodity bull market, by 300%. So I just play it simple and buy the commodity itself.
Ha, I agree with that statement about AVERAGES. Its all about reading the statistics right man. Just because commodities have earned more on average does not make them a safe or safer investment per say. I do not purchase funds though, I invest in stocks, keeping me clear of the Bull/Bear mentality. I hold a very concrete bottom up, as we discussed earlier, allowing me access to companies that hold a current price lower than their current value. Once I determine this stat, I look at macro trends, not before. Looking before largely limits your radius of stocks. I try to buy 5-7 stocks a year, so I take my time with my research and try not to rush into anything unwarranted. If you want to see some of my fundamental reports (1-sheeters), I would love to get some feed back on them.
DeleteHey Jim, sure, we can exchange data and ideas. I can pass you some data too, but they are mostly on commodities for now. I haven't done much research into stocks yet.
Deleteregarding market cycles, I am not saying that there will not be volatility under the Austrian system. There is and will always be volatility, but it is so infinitesimally low and the system was so stable compared to our current system. The US was under the gold standard for 200 years before it became a superpower. And back then, there're booms and busts, but the economy recovered so quickly.
ReplyDeleteIf you have time, I would love to link you some of my articles to read, and give me your opinions. But else, it's ok =) You may leave your comments there if you wish to. Spread out our comments, else it gets a bit cluttered.
Here's a synopsis of what caused the housing bubble in 2007/2008: http://silvernjin.blogspot.sg/2012/08/questions-on-us-economic-crisis.html
Also, you may be interested to read my article about the 1920 Depression that no one is talking about today:
http://silvernjin.blogspot.sg/2013/02/1920-depression-that-no-one-talked-about.html
Under the Austrian system of economics, industries with high market cost (lets use water utilities as an example). Companies like Aqua America have an established foothold that is hard to over-throw due to its concrete and permanent nature. Also when demand is subject to limited change due to necessity of product (such as water/and it is increasingly this way). The same is true for most of the O&G sector and wireless communications, of the top of my head. Also, Austrian economics (in its purest form) is susceptible to monopolistic and oligopolistic market holdings. This is dangerous to progress both in a business sense and in a societal sense. Austrian Economics hardly accounts for price manipulation and assumes David can beat Goliath. There seems, to me, to be quite a few holes in the sustainability of "infinitesimally low" volatility. There was nothing to really recover from 200 years ago. Complexity in the market place has changed and with this change has come with longer delays in recovery time. This could be accounted for just in sheer volume of the market. And you know I will read your other articles, comment on them, and annoy your other followers.
DeleteActually under pure market conditions, no company can have a monopoly, unless they control all the resources, which is highly improbable, and had never happened before. Even John D. Rockefeller, worth an estimated $300 billion adjusted for inflation, had the dream of refining all the world's crude oil, but quickly realised it was impossible. When a market is lucrative, there'll be competitors.
DeleteI doubt anyone can name a monopoly which is totally privately owned, without aid from the government. Such monopolies don't exist. Only government-aided ones do.
In our world today, it is hard for David to beat Goliath because of the various regulations that policy-makers have put into place.
Don't worry, I don't have followers. I started this blog to get things off my chest. I only have 1 or 2 friends who agreed with me after doing research together.
Oh yeah, I remembered you mention something about government plan for the future (eg. green tech and stuff). But actually, if you look at American history, before the creation of the Fed and the income tax, private contributions to R&D were way higher than what the government is putting in right now using taxpayers' money.
Nowadays, there are still rich people contributing to society (such as space and Mars exploration) with their own money. But the majority of the population has had their wealth decimated by inflation (money-printing) and taxation.
I would so love to watch videos of Jim Rogers, if you are kind to send to me please. We can exchange info with each other.
ReplyDeleteJust a note on the tulip mania: Yes, you are right that it is not a money-printing-induced mania. It pops anyway, and no tulip retailer whatsoever was bailed out.
I completed my degree in Finance about 3.5 years ago. I have been a home tutor because it gives me much more freedom to do my stuff, and the income is better. My career goal is to retire earlier than Jim Rogers did. Lol.
I don't have a top 5 market picks. I'm not into stocks for now. From my readings, and if I am right, stocks and commodities normally experience 20-30 years boom and bust cycles. Stocks have been going nowhere since the year 2000. I buy silver, gold, am shorting US long term government bonds, bought the Chinese currency, and am looking to invest in agriculture, Myanmar, and maybe north Korea.
How about you?
I will be sure to record them then. Also, the investment group I am with right now has analyst and managers from different firms come and speak at times. Most handle at least 500mil or more. I can try and get those recordings when they come as well.
DeleteAs for the Tulip Mania, Survival is not impressive since we simply fall back on our darwinistic nature and do what comes naturally. So saying no bailouts happened and look, tulips are still around and the Dutch around means nothing. I just wanted to show non-governemnt regulated burst in history to show feasibility on both accounts. It wasn't meant to be a huge point, just the portrayal of my prior statements.
Fair enough, but I do want to make a small correction. The *average* stocks and commodities experience 20-30 cycles (sometimes more or less depending on what you classify as a boom or bust) Now I comment on lack of AVERAGE stock growth, we are sitting at, near, or above (different means of valuation) all time market highs, signifying the average stock is experiencing growth. This being said, I own very few stocks (13) and I am particular about what I purchase (Weeks of isolated research). I invest exclusively in the equity market as of now, avoiding the urges of quantitative high volume trading, sticking to consistently high average returns. My current major is Finance and Economics, but I am contemplating adding a math major on just for the utility of the major in the long run. I plan on working on wall street for a few year when I graduate, going to graduate school getting a masters in Stats, Finance, Financial Statistics, or Mathematical Analysis. Afterwords, I would like to work for a firm like: Baupost Group, Berkshire Hathaway, OakTree Capital, GreenLight Capital, Pershing Square, Lazard Capital Management, etc. I just want to get into a position to do something significant within my field of interest. (Obviously I will be testing for my CFA during this time). Ultimately, I would like to own my own investment firm or private equity bank though.
Lol yes. My point on the tulip is, people made bad investments and bad bets, and when the day of reckoning came, they dealt with it without bailouts.
DeleteThat's a nice plan you have there. I would also like to have my own private fund too. So that is one small reason I started this blog, to show my friends that I've done some research. All the best to your endeavours.
Ha yeah, Bailout or not, we have to keep moving though. And managing funds is fun man. I wake up for that stuff, to see whats happening in the market place and such.
DeleteI agree it's a load of fun. I'm hoping to go into investment research mode come end of year, after I've settled some stuff in the interim.
Delete