Buffett's Thoughts On Gold

Published in Investing on 2 March 2012

The Sage's latest words and a look at share buyback featured on the boards this week.

Buffett's thoughts on gold

In his famous annual letter to shareholders, Warren Buffett this week pointed out that, at current prices, the value of all the gold ever mined (which would amount to a 68-foot cube) would be enough to buy up all the cropland in the USA, 16 Exxon Mobils, and still have $1 trillion left over. Is he right that buying gold is a mug's game? At Bert's Investor Sanctuary, avidya doesn't agree...

"I like Buffet's image of comparing a notional world gold pile to real productive assets, which as always with Buffet is a folksy and striking image. I also have a lot of sympathy with those who are put off by the 'loonie tunes' conspiracy rantings of many gold bugs! But nevertheless I'd argue that there's something 'special' about gold."

But the board landlord, BertEEE, is on Buffett's side...

"An investment to me is exactly that. You are investing in long-term productive capital. So for an equity you are buying a long-term income stream with profits accruing over time and either being paid out as dividends or retained for internal investment to growth the business. For a bond you are financing a business to invest in growing its long-term income stream and being provided with interest to compensate you for that financing. But gold isn't an investment..."

Got any thoughts about the shiny stuff? Please feel free to join in on the thread.

Reviewing results

Getting other people's takes on company results is one of the best uses of the boards and, over on Paulypilot's Pub - Share Ideas, beans4tea has been taking a look over this week's 2011 figures from investment manager Man Group (LSE: EMG)...

"I remain a very happy holder. I topped up a few times over the last six months and MAN remains my single biggest equity investment. A bit of successful options trading has alleviated the pain of sitting on a paper loss but I remain of the opinion that Man is a £10 stock in waiting. It's very highly geared to a return in risk on the markets. In five years time I think it'll be a long way from here and I'm happy to collect the divis while I wait."

What is it about the company that makes it look such an attractive prospect? You'll have to read it for the details.

Share buybacks

Companies often use spare cash to buy back some of their own shares in an effort to raise the price, with the idea being that future earnings and dividends are spread across fewer shares, increasing the per-share rewards. So why do so many people dislike the idea? Over on High Yield - HYP Practical, OldFoolFred was pondering that very question...

"I've seen a number of criticisms of share buy-backs eg 'I prefer this capital return plan a lot more than share buy-backs' on a recent post, and don't understand why ltb&h would not approve of these [...]

As long as the company is making an increasing profit per share then I'm happy whether its held within the company (added to capital value), used for a buy-back (almost like a reinvested divi) or paid as dividend (income)."

So what are the advantages and disadvantages of the different methods of boosting shareholder value? There are plenty of opinions voiced in the subsequent discussion.

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Last week's roundup: Choosing When To Sell

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alarmbells 02 Mar 2012 , 12:48pm

He's awfully good but does WB merit three fool articles in two days? And one of them already tackling WB on Gold.

alarmbells 02 Mar 2012 , 12:50pm

Sorry, three in ONE DAY. Four in 2 days...

Cisk999 02 Mar 2012 , 1:21pm

personally I dislike buybacks. Would rather either the company commits to a progressively-rising dividend, one-off special or keeps the cash on the balance sheet (deeply unfashionable I know and inflates p/e ratios).

Afrosia 02 Mar 2012 , 1:45pm

Buybacks have become too popular, in my opinion. Rather than something that is used extraordinarily to buy shares that are hugely undervalued, they are now just used to boost earnings per share (which they necessarily do).

However the boosting EPS argument doesn't really work, since (assuming an efficient capital market) the value of the company will fall by the value of the cash leaving the business and then rise by the increase in EPS. These two figures will always necessarily cancel each other out and the result is a shareholder-neutral transaction... except in the case of undervaluation.

Afrosia 02 Mar 2012 , 1:47pm

Ooops, that should have read "the value of the company will fall by the value of the cash leaving the business and then rise by the increase in EPS multiplied by the relevant earnings multiple".

Sandecker 02 Mar 2012 , 2:04pm

I agree with Cisk999 above. Buybacks are beneficial only to the board members and the large institutions, who have a vested interest in this insidious method. Buybacks are popular inasmuch as it enhances the earnings figure, thus allowing board members to achieve their bonus target, based on an improved earnings figure. These people do not place the interests of their shareholders above their own pocket. It's akin to throwing shareholders money down the toilet!

However, those companies who distribute dividends, demonstrate they have the interests of their shareholders foremost and are likely to keep them on board in the future. Rising dividends have always pleased investors. In addition, dividends paid out cannot be hidden in the company reports, whereas buybacks can often disguise the true state of a company's financial position, otherwise known as creative accountancy.

numberjak99 13 Mar 2012 , 10:31am

Buffett’s gold commentary is a little difficult to believe. He says something like this a few times each year, but at the end of the day gold is up over the last five years, and Berkshire Hathaway is not. As Merryn Somerset – Webb at MoneyWeek keeps saying, Buffett is just not credible on gold. I wonder what his father Howard would think if he were alive…

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