Warren Buffett: Forget Gold, Buy Stocks

[Parsad]

Article by Ben Stein after having dinner with Buffett.  Cheers!

 

http://money.cnn.com/2010/10/18/pf/investing/buffett_ben_stein.fortune/index.htm

[ERICOPOLY]

Mr. T is a better source of information on gold:

 

http://video.forbes.com/fvn/business/mrt-on-gold

 

[Guest broxburnboy]

I bet Mr. T bought Ben Stein's scrap gold ... Mr. T. was obviously anticipating the record highs in Gold and Silver immediately after Mr. B's QE2. 

Just like last time (QE1).. the USD dollar goes immediately south against gold.

 

http://321gold.com/

[Guest broxburnboy]

Sprott's John Embry weighs in on Munger and WEB's comments re gold:

 

http://www.sprott.com/Docs/InvestorsDigest/2010/MPLID_112610_pg401Emb.pdf

 

[omagh]

In the words of his employer...

http://www.investorsdigestofcanada.com/

One of Canada’s most prominent “gold bugs,” John Embry manages the Sprott Gold & Precious Metals Fund. He brings Investor’s Digest readers a unique and fascinating perspective on the precious metals market.

 

Embry is obviously talking his book...

 

-O

Embry says "....I have no objection to Buffett's endorsment of farmland and stocks like Exxon Mobil...."

 

Is Buffett really endorsing it or just making a point? Who is this Embry? Why is he mis-interpreting what Buffett and Munger said?

[merkhet]

 

Embry is obviously talking his book...

 

 

That's certainly true, but I think the Sprott crew is, on the whole, pretty much on the up and up -- though we'd have to be cautious in ferreting out any confirmation biases, etc.

[Guest broxburnboy]

 

Embry is obviously talking his book...

 

-O

Embry says "....I have no objection to Buffett's endorsment of farmland and stocks like Exxon Mobil...."

 

Is Buffett really endorsing it or just making a point? Who is this Embry? Why is he mis-interpreting what Buffett and Munger said?

 

Everyone talks their book..especially Buffett himself, although WEB has said that gold has outperformed BRK consistently over the last decade.

Embry is the lead strategist with Sprott group, once the lead investment strategist with a major canadian bank. His legacy funds and indeed the whole group of funds.. the Sprott Hedge fund LP and the Sprott Canadian Equity funds have lit up the scoreboard over the past decade:

 

http://www.sprott.com/priceperformance.aspx?id=15&t=2

 

I'm talking my book here as well...have shares in SII (Sprott Inc.), Sprott Resource corp (SCP-T), Sprott Opportunities Hedge fund etc.

 

[merkhet]

Sprott Resource Corp. is probably one of my favorite holdings right now.  (So I guess I'm also talking my book too when it comes to Embry.)  It'll be interesting to see if the gap to NAV closes more rapidly once the 16 million warrant overhang is done with on the 31st.

[omagh]

merkhet,

 

Long ago, I realized that I have no special abilities to predict the price of commodities or the price of money (interest rates).  I do have some meagre ability to judge intrinsic values of cash-generating enterprises that have low capital expense requirements.  I stick to my knitting and it serves me well. 

 

I feel quite liberated ignoring companies that depend on the price of oil, gas, metals and so on -- others may feel they have some special knowledge here.  It allows me to focus on things that matter in my modelling of intrinsic values and where I have some small advantage that outperforms regularly with very rare downside surprises.  Buffett, Graham, Klarman, Templeton, Watsa, and others (the grandmasters) give us examples to study and learn from.  On this board there are many who share regularly and have fantastic ideas.  Some ideas work short term, investing frameworks from those grandmasters work long term.

 

All the best in your investing journey!

 

-O

 

Sprott Resource Corp. is probably one of my favorite holdings right now.  (So I guess I'm also talking my book too when it comes to Embry.)  It'll be interesting to see if the gap to NAV closes more rapidly once the 16 million warrant overhang is done with on the 31st.

[bargainman]

Sprott Resource Corp. is probably one of my favorite holdings right now.  (So I guess I'm also talking my book too when it comes to Embry.)  It'll be interesting to see if the gap to NAV closes more rapidly once the 16 million warrant overhang is done with on the 31st.

 

The only think that I don't like about Sprott Resource is their hedge fund fee arrangement with Sprott Asset management.. It's sounds worse than Biglari's..

 

"In consideration for providing these services, the Company agreed to pay SCL an annual services fee equal to 2% of the net asset value (as defined in the MSA) of the Company calculated and payable at the end of each calendar quarter based on the average quarter-end net asset value of the Company and an annual incentive fee equal to 20% of: (a) the pre-tax profits of the Company for the year minus (b) the average month-end net asset value of the Company for the year multiplied by the percentage return of the Canadian 30-Year Generic Bond Index. On December 1, 2007, SCL assigned the MSA to SCLP, the successor to SCL, as part of an internal reorganization involving SAM and its subsidiaries. No amount has been included in the above commitments schedule for fees payable under this agreement."

[oec2000]

Sprott Resource Corp. is probably one of my favorite holdings right now.  (So I guess I'm also talking my book too when it comes to Embry.)  It'll be interesting to see if the gap to NAV closes more rapidly once the 16 million warrant overhang is done with on the 31st.

 

Where do you peg NAV to be? I have it pretty close to where the stock is trading now. The warrants, at $4.25 are not hugely dilutive. Fwiw, I have recently added because I think there is potentially a lot of latent value in their projects. Good risk reward tradeoff. Imo. Kevin Bamborough has proven to be a disciplined and astute asset allocator.

 

Long ago, I realized that I have no special abilities to predict the price of commodities or the price of money (interest rates).  I do have some meagre ability to judge intrinsic values of cash-generating enterprises that have low capital expense requirements.  I stick to my knitting and it serves me well. 

 

I feel quite liberated ignoring companies that depend on the price of oil, gas, metals and so on -- others may feel they have some special knowledge here.  It allows me to focus on things that matter in my modelling of intrinsic values and where I have some small advantage that outperforms regularly with very rare downside surprises.  Buffett, Graham, Klarman, Templeton, Watsa, and others (the grandmasters) give us examples to study and learn from.  On this board there are many who share regularly and have fantastic ideas.  Some ideas work short term, investing frameworks from those grandmasters work long term.

 

Fair comments but history shows that these gurus do not completely eschew investing in commodity or macro-type ideas. Their success comes from being able to handicap odds well and to apply that skill in a disciplined way. It may be useful to try and learn how they do it and not keep our minds completely closed to it.

 

The only think that I don't like about Sprott Resource is their hedge fund fee arrangement with Sprott Asset management.. It's sounds worse than Biglari's..

 

As far as hedge or private equity funds go, their fees appear normal. I thought the problem with Biglari was that he changed the rules midstream - not sure how your comparison is valid. Care to clarify?

 

As to hedge fund type fees, I do not quite get why there is such appears to be such dislike/disgust (it's just my impression; I might be mistaken) on this board for such performance-linked fee structures. WEB used it before and many managers that are spoken of highly here (Klarman, Chou, McElvaine, etc) charge performance fees. As long as they provide fair value in return, what is the problem? If I could go back in time and invest $100K with George Soros when he launched the Quantum Fund, why wouldn't I?

[merkhet]

 

Where do you peg NAV to be? I have it pretty close to where the stock is trading now. The warrants, at $4.25 are not hugely dilutive. Fwiw, I have recently added because I think there is potentially a lot of latent value in their projects. Good risk reward tradeoff. Imo. Kevin Bamborough has proven to be a disciplined and astute asset allocator.

 

 

oec2000, I've got NAV pegged at somewhere between $6 to $7 accounting for the 7 million share buyback.  I think Orion Oil is trading a bit low based on comparable sales estimates per flowing barrel @ around $64,000/boepd last I checked.  I prefer to use a multiplier on steady-state flows based on management's statements that they're trying to build Orion for sale in the future, so I think using comparable sales metrics is the better way to view Orion rather than the current market cap.

 

It's likely that I won't sell even if they hit my NAV estimates though.  I saw (still see) Sprott Resource Corp. as a way to buy into a growth company (subsidiaries) at a discount to what the company would be worth even sans growth.

 

 

Long ago, I realized that I have no special abilities to predict the price of commodities or the price of money (interest rates).  I do have some meagre ability to judge intrinsic values of cash-generating enterprises that have low capital expense requirements.  I stick to my knitting and it serves me well.  

 

I feel quite liberated ignoring companies that depend on the price of oil, gas, metals and so on -- others may feel they have some special knowledge here.  It allows me to focus on things that matter in my modelling of intrinsic values and where I have some small advantage that outperforms regularly with very rare downside surprises.  Buffett, Graham, Klarman, Templeton, Watsa, and others (the grandmasters) give us examples to study and learn from.  On this board there are many who share regularly and have fantastic ideas.  Some ideas work short term, investing frameworks from those grandmasters work long term.

 

 

omagh, for the most part, I actually agree with you here - though I would be quick to point out that Buffett owns some Exxon and Klarman owns a large chunk of Breitburn Energy Partners (though BBEP is largely hedged) - so I wouldn't entirely write off all commodities.

 

For me, I like traditional value-type investments (Graham, early Buffett, Klarman) like Kirkland's Inc., and they constitute a pretty good chunk of my portfolio.  However, I also like less traditional "value"-type investments (Munger, late Buffett) like BYD Company.  Long runway, a nice (hopefully growing) moat, and something that, if all goes well, I never have to sell so I can save a few percentage points a year that I don't have to give to the government, etc.

 

I think there's a benefit in keeping an open-mind in applying the value approach to different kinds of investments.

[bargainman]

The only think that I don't like about Sprott Resource is their hedge fund fee arrangement with Sprott Asset management.. It's sounds worse than Biglari's..

 

As far as hedge or private equity funds go, their fees appear normal. I thought the problem with Biglari was that he changed the rules midstream - not sure how your comparison is valid. Care to clarify?

 

As to hedge fund type fees, I do not quite get why there is such appears to be such dislike/disgust (it's just my impression; I might be mistaken) on this board for such performance-linked fee structures. WEB used it before and many managers that are spoken of highly here (Klarman, Chou, McElvaine, etc) charge performance fees. As long as they provide fair value in return, what is the problem? If I could go back in time and invest $100K with George Soros when he launched the Quantum Fund, why wouldn't I?

 

Well Buffet didn't charge a 2% fee on net assets.  He charged 0 below a certain hurdle rate, same as Pabrai and Sanjeev.  Then he only charged 25% (I think) if he beat that hurdle rate.  I actually have less of a problem with the incentive fee than I do with the 2%/year on nav fee.  I mean that's a 2%/year headwind, regardless of yearly performance, and I'm not sure that's something that can easily be overcome by holding commodities like gold etc.  Do you think it's a headwind that's reasonable enough?  Especially for commodities?  

 

Personally I had less of an issue with Biglari than others on this board, but I never thought of him as the second coming of Buffett, I always figured he was out to get rich any way he could, and the incentive program while generous, doesn't make me feel cheated.  The fact that he doesn't get an incentive regardless of performance (other than base salary) is the thing that made me say that Sprott's arrangement is worse.

 

Ie.. BH book value grows by 0%, Biglari gets no payout.

Sprott resource nav grows by 0%, Sprott gets 2% of assets, shrinking investable assets...  Say for whatever reason NAV goes down, they still get 2% of nav..

 

I guess Biglari's incentive program in a corporate structure still resembles the Buffett Partnership, while the Sprott resource one resembles the new 2/20 hedge fund structure even though it's a company not a hedge fund.

 

Oh, and the "he changed the rules midstream" thing doesn't bug me either since he originally said one thing when he was taking over the company, and then things changed, he rolled Western and his hedge fund into the company which was an entirely different situation.  

 

Anyway I don't want to get into a big long BH discussion, but I just want to point out that 2/20 on a public company structure with commodities strikes me as high... higher than BH

 

But maybe I'm missing something?

[oec2000]

oec2000, I've got NAV pegged at somewhere between $6 to $7 accounting for the 7 million share buyback.  I think Orion Oil is trading a bit low based on comparable sales estimates per flowing barrel @ around $64,000/boepd last I checked.  I prefer to use a multiplier on steady-state flows based on management's statements that they're trying to build Orion for sale in the future, so I think using comparable sales metrics is the better way to view Orion rather than the current market cap.

 

Merkhet,

For purposes of estimating SCP's NAV, I think it is fairer to take just OIP's quoted value. (The same way we would use, for e.g., WFC's quoted price and not our estimate of its fair value when computing FFH's BV.) In any case, the market values OIP at about $320m EV, or about $50,000/boepd which is not too bad considering it is 50% gas.)

 

On this basis, SCP's unrealised gains amount to approx $230m. This is consistent with the number that management gave on the last conference call of $200m. After taxes and SCLP's carried interest, the net gain is only about $145m, which when added to the Q3 NAV and allowing for the full conversion of warrants gives a revised NAV of about $4.80.

 

Well Buffet didn't charge a 2% fee on net assets.  He charged 0 below a certain hurdle rate, same as Pabrai and Sanjeev.  Then he only charged 25% (I think) if he beat that hurdle rate.  I actually have less of a problem with the incentive fee than I do with the 2%/year on nav fee.  I mean that's a 2%/year headwind, regardless of yearly performance, and I'm not sure that's something that can easily be overcome by holding commodities like gold etc.  Do you think it's a headwind that's reasonable enough?  Especially for commodities? 

 

SCP is a commodity-focused private equity fund, not a fund that simply invests in commodities. As I said, it's fees are not out of line with the private equity/hedge fund industry.

 

As to whether they can overcome the 2%/year headwind, consider these facts. Their first investment, PBS Coals, achieved a 4x return within one year (in 2008, the year of the crash!) and they have grown NAV from $1.50 at the end of 2007 to about $4.80 currently - a triple in 3 years (after fees and taxes too!). Investors would be actually be worse off if they had adopted WEB's incentive formula. The beauty in these returns is that they have been achieved by taking a lower risk approach to resource investing. It remains to be seen where they go from here but I think you would be hard pressed to find any other fund that has done as well as they have over this 3 year period. It is important to point out that they do not need commodity prices to rise from here for investors to make good returns going forward - they just need to prove up the feasibility of a couple of their projects.

 

In my mind, there is no question they have quite fairly earned their fees (and taken care of the headwinds for the next 20 years at least). This brings me back to my original point about not understanding why people would summarily write off 2+20 funds without first investigating what they are capable of.

[Guest broxburnboy]

It's never bothered me to pay the 2/20 fees to managers that earn it. It bothers me immensely to pay 2.5% or thereabouts for mediocre sub-index returns and I am absolutely fit to be tied over one legacy, illiquid investment of mine whose market value has eroded steadily over the last decade which nonetheless is an ongoing generator of fees for its broker/manager.

 

I only directly manage my own RRSP account, my other family/corporate accounts are in the hands of 2/20 managers like Vertex One and Sprott. Both these companies floated to the top performance wise from others I have tried and I consider them the best investment choices I have made.

I feel the same way about them as I used to feel after writing a huge commission cheque to a salesperson... I love the fact that their commission is huge.

[alwaysinvert]

It's never bothered me to pay the 2/20 fees to managers that earn it. It bothers me immensely to pay 2.5% or thereabouts for mediocre sub-index returns and I am absolutely fit to be tied over one legacy, illiquid investment of mine whose market value has eroded steadily over the last decade which nonetheless is an ongoing generator of fees for its broker/manager.

 

I only directly manage my own RRSP account, my other family/corporate accounts are in the hands of 2/20 managers like Vertex One and Sprott. Both these companies floated to the top performance wise from others I have tried and I consider them the best investment choices I have made.

I feel the same way about them as I used to feel after writing a huge commission cheque to a salesperson... I love the fact that their commission is huge.

The problem is to even find any single one who actually is worth 2/20, which is a mind-boggingly huge fee. I think there is a good chance that you are beeing fooled by randomness.

[Guest broxburnboy]

 

The problem is to even find any single one who actually is worth 2/20, which is a mind-boggingly huge fee. I think there is a good chance that you are beeing fooled by randomness.

 

If I am being fooled ..it is by the same (remarkably consistent, long term) randomness that is fooling every other investor here.

 

These don't look like the historical records of random after fee returns, they look remarkably like the major index funds on steroids:

 

http://www.vertexone.com/wp-content/uploads/pdfs/Alternative%20Funds/Performance-Sheet-ALTFUNDS.pdf

 

http://www.sprott.com/docs/Performance/opp_hedge.pdf

 

 

[alwaysinvert]

 

The problem is to even find any single one who actually is worth 2/20, which is a mind-boggingly huge fee. I think there is a good chance that you are beeing fooled by randomness.

 

If I am being fooled ..it is by the same (remarkably consistent, long term) randomness that is fooling every other investor here.

 

These don't look like the historical records of random after fee returns, they look remarkably like the major index funds on steroids:

 

http://www.vertexone.com/wp-content/uploads/pdfs/Alternative%20Funds/Performance-Sheet-ALTFUNDS.pdf

 

http://www.sprott.com/docs/Performance/opp_hedge.pdf

 

 

I am not questioning their ability to beat the index before fees (I'm not familiar with those funds at all), it's just that I hardly think there would be anyone in the world worth those fees. Of course. after any given period, if it's not too long, there is still going to be someone who actually did beat their indexes, but that's just basic survivorship bias at work.

 

This is just the opposite of the tale of the superinvestors, where the overachievers were pre-identified.

[bargainman]

It's never bothered me to pay the 2/20 fees to managers that earn it. It bothers me immensely to pay 2.5% or thereabouts for mediocre sub-index returns and I am absolutely fit to be tied over one legacy, illiquid investment of mine whose market value has eroded steadily over the last decade which nonetheless is an ongoing generator of fees for its broker/manager.

 

I only directly manage my own RRSP account, my other family/corporate accounts are in the hands of 2/20 managers like Vertex One and Sprott. Both these companies floated to the top performance wise from others I have tried and I consider them the best investment choices I have made.

I feel the same way about them as I used to feel after writing a huge commission cheque to a salesperson... I love the fact that their commission is huge.

 

The problem of course is, you don't know if they will earn it until after the fact.  With Buffett's structure he didn't get it unless he earned it, since he got 0 unless he hit a hurdle.  With a 2/20, especially the 2 part, it means they get it whether they earn it or not, and that's unknowable until later.  I'm not saying Sprott isn't likely to earn it given their past, but it's still pretty high. Studies have been done on mutual funds showing that performance has an inverse correlation with fees in the long run, ie the lower the fees the higher the likely performance, Vanguard harps on this constantly.  Anyway I think I'll spend some more time investigating them.  Sprott Resource definitely looks like a very interesting set up focused on commodities which should be a good inflation hedge and good counter part to any equity focused portfolio.  Gold, farmland, uranium, what's not to like?  Swizzled wrote a piece on them a while ago too.

 

Thanks

[oec2000]

The problem is to even find any single one who actually is worth 2/20, which is a mind-boggingly huge fee. I think there is a good chance that you are beeing fooled by randomness.

 

What about Buffett, Watsa and Klarman and for that matter, Soros and Blackstone? I think they would be worth paying 2+20 for. 15% and 20% gross returns translate into net returns after 2+20 fees of roughly 11% and 15% - pretty respectable, imo. So, the question boils down to whether there are sound managers out there who can achieve greater than 15% gross returns. I think there are.

 

You do make a valid point about the difficulty of differentiating between the real superinvestors and the others who are just "lucky monkeys." However, if you accept that we can pick winners like Watsa and Klarman (who are not pre-identified superinvestors), then you can't rule out the possibility of finding other superinvestors. I agree it is risky just to look at past performance because you can fooled by randomness. You can reduce the risk of being fooled by looking closely at the investment style and philosophy of the manager and whether he sticks to his claimed knitting.

[alwaysinvert]

The problem is to even find any single one who actually is worth 2/20, which is a mind-boggingly huge fee. I think there is a good chance that you are beeing fooled by randomness.

 

What about Buffett, Watsa and Klarman and for that matter, Soros and Blackstone? I think they would be worth paying 2+20 for. 15% and 20% gross returns translate into net returns after 2+20 fees of roughly 11% and 15% - pretty respectable, imo. So, the question boils down to whether there are sound managers out there who can achieve greater than 15% gross returns. I think there are.

 

You do make a valid point about the difficulty of differentiating between the real superinvestors and the others who are just "lucky monkeys." However, if you accept that we can pick winners like Watsa and Klarman (who are not pre-identified superinvestors), then you can't rule out the possibility of finding other superinvestors. I agree it is risky just to look at past performance because you can fooled by randomness. You can reduce the risk of being fooled by looking closely at the investment style and philosophy of the manager and whether he sticks to his claimed knitting.

I do accept that we could pick risk-adjusted winners "after the fact", for example Klarman, by looking at their past performance both quantitatively and qualitatively (but certainly not just quantitatively), although I still wouldn't pay 2/20 for them. You could call that my margin of safety.

[Guest Dazel]

 

simle math...you need to pick an investor who is a winner and then it is free...

if you have gains they are taxable...assuming it is not tax sheltered money.

So your deduction of the 20% offsets the taxbale gains you would have had to pay

anyways. The 2% is a debate.

So 401k and rrsp could swayed towards an index the other could  be put with the money makers. As Buffett has said the index should be stagerred investments. Jeremy Grantham says the same.

Cundill (the new team follows the same cooking) has had one of the best longterm records around and was mentioned by Buffett as a possible candidate for Berkshire.

Dazel