Warren Buffett shows his wit as he explains to beginner investors his conviction that gold is a speculative investment and that there are two types of asset classes: productive assets that continuously create value and income, and non-productive assets like precious metals, commodities, art, and collectables. Warren Buffet vastly prefers productive assets.
Summary of video: Buffett: ‘Gold is a speculative investment!’ (video)
Key points about speculative investments from this video:
- Non-productive assets include precious metals, commodities, art, and collectibles. They do not create any income for your during the period you own them. You speculate that the next buyer will want to pay more for it than you did. For gold, this is usually driven by fear. If they are more afraid you make money; less afraid you lose money.
- Any decent productive asset is going to kill a non-productive asset over time.
- A productive asset produces income for you while you own it. You don’t need to sell it for it to be a great investment.
- The real test of whether you would like it as an investment is whether you would be happy if it never got quoted again.
- In any given short period of one to five years, any the asset can outperform another asset.
A related video makes the point that speculating about which asset class will be the best this year is rather pointless. But over the long term, returns are roughly as expected and proportional to investment risk.
Transcript of Buffett: ‘Gold is a speculative investment!’ (video)
(At time 0:09 start CNBC)
You had a shareholder who asked a question about gold over the weekend and your response was pretty interesting: Berkshire versus gold. Do you want to talk about how that’s performed over the years?
Yea, but we can go beyond that. But certainly, when we took over Berkshire, Berkshire was selling at fifteen dollars a share and gold was selling a twenty dollars an ounce. A gold is now $1600 and Berkshire is $120,000. But, you can take a broader example than that. If you buy an ounce of gold today and hold it a hundred years, you can go to it every day, and you could koo-joo it, and you can caress it, and you can fondle it, and a hundred years now you’ll have one ounce a gold and it won’t have done anything for you in between.
If you buy a hundred acres of farmland, it will produce for you every year. You can use that money to buy more farmland. You can do all kinds of things. But for 100 years it will produce things for you and you still have a hundred acres of farmland at the end of the hundred years.
You could buy the Dow Jones industrial average for $66 at the start of 1900. Gold was then $20. At the end it was $11,400 but you’d have gotten dividends for a hundred years. So a productive asset of any kind, a decent productive asset, is going to kill a non-productive asset over time. Now in any given one-year period, five year period, any the asset can outperform another asset. Tulips did well for awhile.
Warren, why don’t you join me and buy some cows? I like your farmland, but you know, you’re in Nebraska for . . . . Iowa. You love steak. I mean: we can have leather. we can have manure, we can have milk, we can have meat, …
You can have the manure. I’ll take the meat.
No, but well we employ people taking care the cows. That little bar of gold, it’s worth 53 whatever, we had one in here… Look, I think it is more like sixty or seventy thousand dollars. I can get like so many head of cattle for that and be productive. That was my point. But you like farmland. You just too lazy to take care the cattle or something? Pay some people.
Absolutely absolutely. Have you ever tried to take care of cattle Joe?
I think it might be hard. I’ve tipped a few . . .
With land you can get somebody else to do all the work, give them a percentage of the crop and you can sit back there for a hundred years and get a percentage of the crop and you still got the land when you get all through. I will guarantee you that farmland over a hundred years is going to beat gold, and so are equities.
Listening to you talk now, Warren, with your comments about bonds—that makes me think a financial assets in general, which include stocks, and I think about the printing presses, not only in this country but around the world, you’ve seen the commercial Ca-ching Ca-ching … with the central banks, and there are periods where financial assets are great, from like the early eighties to 2000, and I just wonder if there’s then periods where hard assets are great. And you see Paulson in gold, and some these other guys in gold or commodities. Are you just not comfortable with commodities? Are there times where you should be downplaying maybe stocks, and maybe businesses, and going totally full-bore into commodities? Are you just not comfortable doing that?
No, the alternative with me Joe, the alternative —I don’t why I don’t like fixed-dollar investments at all. I don’t like short term bond. I don’t like long-term bonds. We hold a lot of short term bonds but that is not because we like them. That’s just a parking place. But the alternative, and in my view I mean, certainly commodities can be an alternate, but the alternative is income-producing assets of one sort or another that that are not fixed dollar type investments. And so I’ve said consistently for the last few years, I would vastly prefer it all in common stocks than fixed dollar investments over five or ten year periods—I don’t know about the next five hours, or five days—and that might very well extend to rental real estate, it might extend to farms.
I mean—an investment—you’re looking for something where you put out money now, and that asset that you buy gives you back more money over time. Now the problem with commodities is that you’re betting on what somebody else will pay for them in six months. The commodity itself isn’t going to do anything for you.
So there’s two types of assets to buy. One is where the asset itself delivers a return to you such as in a rental property, stocks, a farm. And then there’s assets you by where you hope somebody else pays you more later on but the asset itself doesn’t produce anything. Those are two different games; I regard the second game is speculation.
There’s nothing immoral or illegal or fattening about speculation, but it as a entirely different game to buy a lump of something and hope that somebody else will pay you more for that lump two years from now, than it is to buy something that you expect to produce income for you over time. I bought a farm 30 years ago, not far from here. I’ve never had a quote on it since. What I do is I look at what it produces every year and it produces a very satisfactory amount relative to what I paid for it.
If they close the stock market for ten years, and we owned Coca-Cola and Wells Fargo and some other businesses, it wouldn’t bother me because I’m looking at what the business produces. If I buy a McDonald stand, I don’t get a quote on it every day, I look at how my businesses is every day. So those are the kind assets I like to own: something that actually is going to deliver, and hopefully deliver to meet my expectations over time.
(5:49) A piece of art, you know, may go from a thousand dollars to fifty million dollars, but it’s dependent on what the next guy wants to pay me. The art itself, the painting itself, is not going to dispense cash, so I have to find somebody that’s going to like it more. And with an asset like gold, for example, you know basically gold is a way of going along on fear. And it’s been a pretty good way of going along on fear from time to time, but you really have to hope they will become more afraid in the year, two years, than they are now. And if they got more afraid you make money, and if they become less afraid you lose money. But the gold itself doesn’t produce anything.
Well then, speaking a gold though, we’re looking at gold prices and they were at another record high they are up another three dollars today: $1,434 dollars an ounce. And there’ve been some big hedge fund managers like a Paulson or David Einhorn who really buckle down on these bets. Why would you steer clear? And do you think what they’re doing is the wrong thing?
Well I just don’t know. I don’t know whether cotton’s going to go up. I mean, we use a lot a cotton. I’ve watched it go from 80 cents to $1.90. We use a lot of copper and I’ve watched it go from two dollars to four dollar-plus. So, there’s all kinds of things in this world that are going to go up and down in price, and maybe hamburgers will tomorrow. But I don’t know how to judge that. I do know how to judge, to some extent, the earning power of some businesses. And the real test of whether you would like it as an investment is whether you would be happy if it never got quoted again. And just in terms of what the asset did for you.
(7:23) I will say this about gold: if you talk all the gold in the world it would it would roughly make a cube 67 feet on a side. So if you took all the gold in the world we could have a cube down there 67 feet, sixty seven feet high, and that would be the whole thing. Now for that same cube of gold—it would be worth it today’s market prices about seven trillion dollars—that’s probably about a third of the value of all the stocks in the United States. So you can have a choice of owning a third of all the stocks in the United States, or you have a choice or owning a block up gold which can’t do anything but shine and make you feel like Midas or Cresus or something of the sort.
Now for seven trillion dollars . . . There are roughly a billion acres of farmland the United States. They are valued at about two and a half trillion dollars. About half the continental United States is farmland. You could have all the farmland in the United States, you have about seven Exxon Mobil’s, and you have a trillion dollars a walking around money. And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, you know and maybe touching it and fondling it occasionally, you know, and then saying “Do something for me.” And it says, “I don’t do anything. I just stand there and look pretty.” And the alternative to that was I have all the farmland in the country—everything: cotton, corn, soybeans—7 Exxon Mobil just think of that, add a trillion dollars walking-around money. . . Call me crazy but I’ll take the farmland and the Exxon Mobils.
Alright, that make some sense, Carl, you got a question too?
I’m still trying to get the image in Warren fondling a giant block and gold.
Yea, fondling it occasionally was what stuck with me.
Bring me a block of gold and you’ll see me fondle like you’ve never seen me fondle before. . . .
(9:25 Buffet continues in a different interview)
Footnotes and Credits:
This video was produced by CNBC and posted to YouTube by Johny Holding.