A Case of Cult Envy
Today, we examine two cults — one with a charismatic leader and millions of disciples; and one with no leader whatsoever, but billions of disciples. Neither cult engages in fringy activities like polygamy, sacrificing goats or building armed compounds in the desert. Nevertheless, both cults attract a very fanatical following.
Today, we examine the cult of Berkshire Hathaway and the cult of gold-buying. The former pays homage to Warren Buffett; the latter genuflects at the altar of Hard Money.
[To disclose your editor’s biases in advance of making them obvious to all, he is far more sympathetic to the gold-buying cultists than he is to the Berkshire cultists. In fact, he owns gold, but has no position of any kind in Berkshire Hathaway.]
If you always wanted to belong to a cult, but didn’t want to deal with the threat of a federal raid or the hassle of raising dozens of children who may or may not possess your DNA, Berkshire Hathaway may be your ticket. In fact, Berkshire may be the most “cultish” cult since the Branch Davidians.
Let’s pull back the sacred shroud to examine the evidence…
Once a year, you get to join your fellow cultists in Omaha for Berkshire’s annual shareholder meeting — the “Woodstock for Capitalists.” Additionally, you get to quote the utterances of your leader as if they were holy writ. Best of all, you don’t have to surrender your possessions to the community of believers. Instead, you get to make even more money for yourself.
Unfortunately, like most cults, the early adopters have fared better than the late converts. (You may have noticed, for example, how the leaders of a cult often partake of the identical earthly pleasures that they instruct their followers to renounce. Similarly, the early adopters of the Berkshire Hathaway cult have enjoyed much greater earthly pleasure than the latter-day converts.)
A buyer of Berkshire Hathaway common stock at the end of 1988, for example, would have received a robust 31% annualized return on that investment over the ensuing decade. By contrast, a buyer of Berkshire Hathaway common stock at the end of 1998, would have received a dismal 3.3% annualized return over the ensuing decade — or less than half the return of simply buying a 10-year Treasury.
Curiously, the worse Berkshire’s investment performance becomes, the greater the frenzy to attend the company’s annual love-in… and the higher the price to break bread with the cult leader.
As the chart above illustrates, the attendance at Berkshire’s annual meeting in Omaha has exploded from a mere 15 individuals in 1981 to about 40,000 last year. And as the chart below illustrates, the winning bid to purchase a lunch for eight with Warren Buffett has skyrocketed from $25,000 in 2000 to $2.6 million last year. If this “lunch with Warren” were a stock, its value would have increased at a compound annualized growth rate of more than 50%!
Still not convinced Berkshire is a cult?
Here’s the clincher: The Berkshire cultists hold the members of other cults in contempt…especially members of the gold-buying cult.
In this year’s letter to the Berkshire faithful, Warren Buffett derides gold as an asset that is “forever unproductive.”
“[Gold] will never produce anything,” the Grand Pooh-Bah of Berkshire Hathaway declares, “Gold has two significant shortcomings, being neither of much use nor procreative.
“This type of investment,” says Buffett, “requires an expanding pool of buyers who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future.”
Of course Buffett scorns gold! It represents the opposite of everything that enabled him to become a billionaire. He amassed most of his billions betting on anti-gold investments in an anti-gold era. He acquired most of his über-wealth during the disinflationary decades of the 1980s and 1990s. He became an investment genius, thanks largely to a mighty US economy that featured low inflation, low taxation, a reliable rule of law and a stable dollar.
But gold’s steady climb since the 1990s suggests that the foundations underlying Berkshire’s success are rotting a bit. The current generation of American capitalists faces a much more hostile environment than did Warren Buffett at the dawn of his legendary career.
Berkshire Hathaway is a leveraged play on the American enterprise. It always has been…and so it remains. As the American enterprise flourished throughout the last 50 years, so did Berkshire Hathaway. But now that the great American economy has started sputtering a bit, Berkshire’s spectacular long-term track record is becoming less and less spectacular.
In other words, the world is changing before our eyes, but Buffett seems to have little desire to change with it. Perhaps he is incapable of doing so. He knows what has worked for him and assumes that it always will. Gold has never been a part of Berkshire Hathaway’s secret sauce…and it still isn’t.
Buffett’s contempt for gold, therefore, feels more like a wish then an investment insight. But so far, he appears to have tossed his shiny pennies into the wrong wishing well.
Despite gold’s “significant shortcomings,” it has delivered a much higher return during the last 15 years than the “useful” and “procreative” Berkshire Hathaway. By any quantitative measure, gold has kicked Berkshire’s rear-end from wherever you happen to be reading this column all the way back to Omaha.
And as James Grant, editor of Grant’s Interest Rate Observer, points out, gold is not the only non-procreative asset to have embarrassed the Berkshire Empire during the last decade and a half.
“In 1996,” Grant relates, “a pound of raw cane sugar cost eleven cents. Fifteen years on, at year-end 2011, the same non-procreative pound was quoted at 23 cents. The fact is, that from year-end 1996 through year-end 2011, the hypothetical continuous holder of the generic sugar futures contract earned a compound annual return of 5.13%, while a stockholder in the utterly non-generic Coca-Cola Co. (NYSE:KO) had to settle for a compound annual return of 3.99%.”
“Sixteen years ago,” Grant recalls, “we characterized Coke, only half-facetiously, as the ‘corporate equivalent of Mount Rushmore, the hot dog, the Bureau of Engraving and Printing and Mohamed Ali, all rolled into one.’”
And it was. This iconic Buffett investment was the ultimate “one decision” stock — the stock to buy and hold forever. And yet, despite its red, white and blue pedigree — and Warren Buffett’s wholehearted endorsement — Coke lost some of its effervescence during the last few years. Not only did KO’s investment returns fail to keep pace with raw cane sugar during the last 15 years, they also failed to deliver even half the return of the S&P 500 Index over that timeframe.
In other words, circumstances change. The investing world is never constant. National boundaries move, governments meddle, patterns of international trade shift and economies go boom and bust. These changing circumstances sometimes compel a change of tactics.
“For Buffett,” Grant continues, “Coca-Cola is a prime example of the procreative investment, gold the archetypical other. [But] we submit that Buffett has failed to take proper account of today’s unique monetary backdrop. Interest rates are uncommonly low, worldwide monetary policy unprecedentedly easy. No institution under the sun is so procreative as the quantitatively easing central bank. Faster than even the best businesses can spend cash flow, the Federal Reserve can materialize scrip.”
In other words, the America of Berkshire Hathaway’s future is very unlikely to resemble the America of Berkshire Hathaway’s past.
Today, the Federal Reserve’s printing presses are “firing on all eight,” not the engine of US economic growth. Today, therefore, it is the gold price that is climbing ever higher, not the share price of Berkshire Hathaway.
“Gold is no investment,” Grant winds up. “It is money, and money is, by definition, sterile…Gold is the refuge of the wary. The constructively anxious goldbug will ask germane questions. For instance, what if QE spins out of control? What if the inflation rate gets out of hand? How can I preserve purchasing power sufficient to allow me to buy oodles of Coke at the next bear-market bottom?”
Good questions. And these are exactly the kinds of questions all forward-looking investors may wish to ask themselves, no matter whether they decide to buy gold or Berkshire Hathaway…or both…or neither. Challenging one’s complacent assumptions can be a very constructive exercise…and a profitable one as well.
The appeal of any investment — sugar as well as Coca-Cola, gold as well as Berkshire Hathaway — relies greatly upon the precise monetary and macroeconomic conditions in which it resides. Price also plays a role, of course.
As the writer of Ecclesiastes observed, “There is a time for everything.” In fact, as recent history proves, there is even a time to favor “non-procreative” assets over procreative ones.
Notwithstanding this irrefutable evidence, Buffett insists there is never a “time for gold.” Maybe so, but chose your cults carefully.