Buffet Bugs

What do you call people who follow Warren Buffet sycophantically?  They call people who think it’s a good idea to invest a portion of one’s portfolio in gold, “gold bugs”.  So perhaps we should call them “Buffet Bugs”.    Isn’t that grown-up of me?

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I am victim II: A dialogue with Steve (a progressive Christian)

Craig Carter has written an interesting post entitled, “Secular Politics Infiltrating the Church: Hell’s Scheme to Bring Down Evangelicalism.”  There I’ve entered into a rather lengthy discussion with a self-proclaimed progressive who apparently believes himself to be Christian.  I reproduce here my comments and his responses.  I think it demonstrates that while progressives claim to care about people, they really despise people and are more concerned about re-engineering society to make it more equal–who cares who dies or suffers along the way, just so long as the rich can no longer parasitically leech off of others.  I responded first to his manner in which he responds to Craig Carter and Gordon (another correspondent), while mercilessly libelling the Tea Party.  Later, I explained how progressive, with their need to enlarge the state, had forced me to renounce my US citizenship, resulting in my suffering the loss of my birth right.  The reason that I insist on telling my story about how I’ve suffered is that I still can.  Those whom the progressives around the world have murdered can no longer tell their story.

Peter W. Dunn said…

That’s amazing Steve. You praise Craig and Gordon for civil tone of their responses to you, and then insult the Tea Party, libelling them as liars. Wow. An entire movement of people who want smaller government libelled as liars. You called Ron Paul demonic.

I think you should read my blog Steve: The Righteous Investor. You could start with this:  Worship the invisible God or our modern Idols:  which? 

You wrote:

“Progressives are not trying to replace a deity through gov’t, as you suggest, but progressives do not believe in a theocracy. We believe that ended with Jesus. The gov’t should meet the needs of all people, not just those who are wealthy or favoured by majority status.”

Well with these lines you have proved Craig Carter’s main point in the post. Because a god or an idol is what we have faith in to meet all our needs. You suggest that it is government. I suggest that Jesus is still alive and that it didn’t end with Jesus but he still lives in our hearts by the Holy Spirit. I’m not advocating theocracy–like the progressives who believe in big government that meets all our needs–I believe in small government that doesn’t suck up all the oxygen in the room and thus allows other institutions, like the family and the church, to breath a little too. But you advocate government as panacea and that ultimately is evil.

The socialists, of course, reject God as Jehoveh Jireh, because they believe in government-jireh, which provides everything we need. Who needs faith in a God who strictly prohibits in his Ten Continue reading

Why Warren Buffet is wrong about gold

NB: This post first appeared at Beating the Index.  To read or add to the comments and discussion of this post please go here.

Following the controversial Warren Buffett on Gold Investing article, I thought it would be interesting to read a different opinion on gold.  I asked my fellow blogger and gold investor Peter from the Righteous Investor if he would like to provide an alternative view on gold investing and he kindly accepted. Thank you Peter for providing us with the view from the other side.

Money is a commodity which serves both as an intermediate of trade and a store of wealth.  Money must have the following characteristics to function properly: limited quantity, fungible, portable, available.

An increase in the money supply without a corresponding increase in production of goods and services leads to inflation; inflation of the money supply leads to price increases in the following order:  (i) commodities; (ii) consumer prices; (iii) cost of labor.  Inflation therefore results in a de facto garnishing of wages.  Thus, if a government sells debt which its central bank then monetizes (i.e., quantitative easing), then government spending benefits recipients through doing irreparable harm to savers and wage earners.  Thus, if possible, retail investors must protect themselves from this harm.

Humankind has used gold and silver as money since the dawn of history.  History has shown that gold is too rare and valuable to function as the only money, for the gold standard has led in the past to scarcity, making money too little available to common people. I’ve seen first hand how scarcity of money has lead to serious problems in the Central African Republic, where the local currency is tied to the Euro, which benefits international commerce but doesn’t really help the people on the street to conduct their daily transactions because there are too few small bills and coins.  The gold standard can also lead to this sort of scarcity and that is why in the late 19th century, there were many advocates who wanted to monetize silver.  Nevertheless, the great advantage of precious metals over paper currency is the inability of a government or a central bank to create it at a whim, and therefore they are far less susceptible to inflation.

Warren Buffett’s advice about gold has had a profound effect on retail investors.  He advocates common shares in stocks as better than gold; ironically, one of the most famous articles on how companies do poorly during times of a high inflation was written by none other than Buffett himself ( “How inflation swindles the equity investor”).  So he knows very well that stocks provide little protection from inflation.  So what are retail investors supposed to do?  They can’t buy bonds or common stocks, and in Buffett’s opinion, they are speculating if they buy precious metals. But I ask, why should Buffett care?  Remember, he’s an insurance salesman and he is out to get your money.  He himself has greatly benefited from the bailouts and the monetization of the US Federal debt.  I don’t think he has the best interest of ordinary investors in mind.  And I am not alone in this opinion.

Why there is no gold bubble

An investor, particularly the value investor, must seek to avoid overpriced assets.  Value investors want to find undervalued, underappreciated investments.  There are some pretty strong reasons to believe that precious metals are oversold and not overbought:

  1. Not that much global wealth is invested in gold (see Eric Sprott and Andrew Morris).
  2. There are too many anti-gold bugs.  Despite the performance of gold in the last ten years, there are still many who, like Buffett, do not understand why it is attractive.  There is also an entire school of economics, the Keynesians, who consider gold a “barbaric relic”, and this school has an enormous influence on governments, universities, and the media.  Keynesians have been adamantly opposed to gold and silver money, because it prevents them from manipulating and controlling the economy through monetary policy.
  3. Gold is just keeping up with other commodities and is also tracking the increase of the Federal Reserve money base.  The real bubble is not gold but the US dollar.
  4. Unallocated gold and gold derivatives make up an enormous and extraordinary portion of the supply of gold in the market.  Certain banks have supplied unallocated gold certificates on a fractional reserve basis to their customers (see this explanation by Avery Goodman).  It is difficult to say how much paper gold there is, but GATA’s Adrian Douglas has estimated that there is a 40 (or as high as 100) to one ratio of paper to physical gold.  This is the crux of the matter.  If and when a physical gold run occurs we could see gold jump to 40x the current price in a few days.  For this reason, every prudent value investor should invest in some physical gold and avoid all paper gold derivatives like the plague.  The same is true of silver, but according to analysts such as Eric Sprott and the National Inflation Association, the paper to physical silver ratio is much higher than it is for gold.  This is an important warning:  Do not believe any author who says there is a gold bubble but doesn’t deal with the question of unallocated gold.  In the end, the collapse of the unallocated gold, which is so deceptively co-mingled into the gold market, may become the financial disaster of the century, eclipsing the sub-prime mortgage crisis in its wake.

How I make money from the sector

The gold sector is not safe because of its great volatility.  Since I took my first position in 2006, gold has traded in the range of $600-$1400 per ounce, and gold mining companies have experienced an even greater range of prices.  So it is inadvisable to put all of one’s saving into precious metals in a single day.  The volatility, on the other hand, lends itself to the possibility of a profitable trading scheme.  So my strategy consists of both a base position of shares that I am holding for the long haul, and the trade itself.

(1) Base position:  I started five years ago by establishing a position in Barrick Gold at CDN $33.50.  I’ve never sold those shares.  I have also averaged down, when possible  (e.g., with NGD), to establish my current position.  Here are my current positions that I have accumulated over the last five years, followed by the average cost price:

Barrick Gold (CDN $34.185; +48%), Detour Gold (CDN $14.25; +121%), Lake Shore Gold (CDN $3.41; +19%), and New Gold (CDN $1.94; +471%), Sprott Physical Gold Trust (US $12.24; +2.5%)and Sprott Physical Silver Trust (US $12.65; +37%).

Gold and silver coins and bullion must be stored in a safe place, so I wouldn’t own any unless I believed that the economic collapse was imminent.  Therefore, the Sprott physical gold and silver trusts are a means of having direct exposure to the physical metal without having to worry about being robbed.

(2) Trading:  (a) I used to trade gold mining stocks, especially ABX and NGD.  I would try to buy on dips and take profits as enthusiasm picked up.  (b) One year ago, I started to sell put options because it was safer than taking long positions, though it would reduce the upside potential of my positions.  I have been selling these puts (in ABX, GG, NGD and DGC) since 2010.  I do this trading on the US market whenever possible.  I was of the conviction that QE would cause the mining companies at very least to remain static in value vis-à-vis the US dollar, and indeed, only one out of the multiple positions that I’ve taken in put options has ever been assigned.  I try to sell the puts on dips and I will occasionally buy them back if they make considerable gains in a short period of time.

P. W. Dunn holds a PhD in theology, has taught biblical studies at the undergraduate and master’s level in Africa and Canada, and now is a DIY investor who publishes his ideas about investing and how it relates to Christianity at theRighteous Investor.  His other posts on gold can be read here.

To read the comments and discussion of this post please go here.

Jeet kune do investing (III) vs. conventional investing

I revealed offline to Mich at Beating the Index how much my portfolio (87%) is weighted towards oil and gas stocks, and only C.J.’s (my wife’s) defined contribution plan is in a balance fund.  He wrote:  “Your portfolio is high risk indeed! I imagined you would have some bonds and more utilities, you surprised me really …”  So I even managed to surprise another junior oil investor with my portfolio.

But let’s consider that conventional styles of investing are too rigid.  They present stereotypical strategies for conventional times.   If Bruce Lee had been a financial advisor, he would have advised his clients to adapt fluidly to the market–to anticipate the market’s moves and to respond in a way suited to each individual.  There are no recommended trades, for each investor is unique, with a unique set of risk tolerances, liquidity and investment goals.

I am an inflationista.  There is no doubt in my mind that Bernanke is creating money faster than the credit bubble is deflating; nor do I have any doubt anymore that the Bernanke Put is for real: no matter how fast credit deflates, Bernanke promises to pump it back up with fiat money.  Now the Bank of Canada wants to create inflation, albeit only 2%, but that they also want desperately  to keep the loonie on par with the greenback; and with these two strategies, governor Mark J. Carney will not be able to control run away inflation in Canada.  Indeed, one could argue that the Canadian housing market has already run away from him.   So now I have been investing for the last two years believing that hyperinflation is our opponent, and my jeet kune do moves must adequately anticipate and respond to that reality.

Consider these conventional strategies and how they cannot possibly succeed in time of hyperinflation:

(1) Get out of debt; (2) maintain a balance portfolio; (3) diversify your portfolio; (4) Subtract your age from 100 and this is the percentage of stocks vs. fixed income; (5) Real estate is always a great investment.

(1) Get out of debt.

Debt is always very bad if it is high interest consumer debt (credit cards, lines of credit). But for many people their mortgage is their best protection against hyperinflation–the currency can lose value much faster than you pay off the debt or interest rates can go up.  Creditors lose in inflationary times, and so it stands to reason that debtors can win, provided that their debt is not spent on frivolous consumer goods.

(2) Maintain a balanced portfolio.

A balanced portfolio puts the emphasis on having stocks for growth and fixed income for safety.  But it is questionable whether stocks in general are a good hedge against inflation.   Warren Buffet wrote an article during the height of the last great inflationary period (1977, Fortune Magazine):  “How inflation swindles the equity investor“.  Fixed income investments are a disaster during hyperinflation, especially today, with the rate of return being so pathetic due to artificially low interest rates.

(3) Diversify your portfolio.

I am not sure that this strategy works in conventional times, supposing that such times ever exist.  Diversification is not the same as not putting all your eggs in one basket.  My portfolio includes debt, real estate, oil and gas, and gold mining companies.  But it doesn’t include anything in aviation because my C.J.’s business is in aviation maintenance.  So you won’t see me investing in Bombardier, Boeing, Air Canada or West Jet, because if one company goes down, it can have a domino effect on the entire industry.  That’s not putting all your eggs in one basket.  But those who advocate diversification suggest that the investor either own an index fund or diversified mutual fund, or a roughly equal number of stocks in each of the major sectors of the economy.  I am pretty sure this will only lead to pretty mediocre results.  I’ve noticed over the years that most investor billionaires are barely diversified, but have made their money in highly concentrated moves:  for example, Warren Buffet is mainly an insurance guy.  John Paulsen shorted sub-prime mortgages then bought gold.  Sometimes it is better to get to know one or two industries really well, and stick to what you know.

(4) Subtract your age from 100 and this is the percentage of stocks vs. fixed income.

This bit of conventional wisdom has cost people a lot of money.  The last two years has provided pathetic yield on fixed income and meanwhile we’ve been in a great bull market.  Hyperinflation is going to wipe out whatever seniors have left and they’ll be saying a final “good bye” to their wealth.  The reason why this strategy is wrong is it has an imaginary understanding of what is a high risk investment.  Stocks are considered high risk and fixed income, low risk.  But in hyperinflation, there is nothing more certain to destroy a portfolio than fixed income investments.

(5) Real estate is always a great investment.

The sub-prime mortgage crisis has done much to destroy this myth.  For me, real estate has been a wash in the last two years.  The rental house we bought is up $70,000; but the commercial building in Texas which I bought with my brother has zero equity, is not breaking even, and $70,000 of my initial investment is basically a write-off.  But many people think that real estate will maintain its value in a time of hyperinflation. Gonzalo Lira trounces that myth in an article demonstrating that during hyperinflation the high interest rates and the unwillingness of creditors to lend out a rapidly devalued currency, destroys real estate prices.

Meanwhile, as of this moment, my concentrated jeet kune do portfolio is 86% above book.  Commodities go up during hyperinflation; so my stocks are nearly all in Canadian commodity companies (oil and gas, gold, and sugar).

Why you can’t pay me to own Berkshire Hathaway

To my post “Warren Buffet Redux“, a certain Johnson responded by linking to an article on Buffet’s support of the sterilization of poor people.

This puts Buffet and all his activities beyond the pail for me.  I used to praise his charitable giving.  But now that I see a portion of it is used to exterminate the poor, I am utterly disgusted.  He has the attitude of the Aschen in the episodes of Stargate SG1 2010 and its sequel 2001 (see synopsis below).  The attempt to control the population of a people is an assault and an attack.  I consider it evil.

Synopsis:  The SG1 team meets an advance alien race called the Ashen, who promise to give to earth advance technology to protect them from their enemies the Goa’uld, to provide long life, and to end their problem of over population. SG1 later learn 9 years later however that Ashen’s purpose was actually to wipe out the entire population of earth and to take over its resources.