Gold Beats Buffett

We’re taking the doctor’s orders; 9,000 feet above sea level just doesn’t seem to work for us.

So we moved down to the tiny casita we built near the vineyard, 1,000 feet lower.

We spend the night there and commute back to the main house in the morning.

New adventure

The casita is an adventure in itself.

It was meant to test the limits of minimalism in domestic architecture. Handmade with local materials by your editor and two sons, there is no wood used except in doors and windows.

Bill’s casita near the vineyard
[Click to enlarge]

And the only power comes from a car battery. It powers two lights…and pumps water up to a reservoir. From there, the water flows into a small, black tank, the simplest water heater ever built.

We have cold water in the morning and warm water in the evening. We cook over an open fire.

It’s a delightful little holiday…in its own quirky way.

Dead before arrival

But work goes on! Our job is to keep an eye on the world of money and try to make sense of it.

Two big stories dominated the financial news yesterday — both meaningless.

First, the S&P 500 hit an all-time high…after the Fed made its usual muffled noises about reducing its balance sheet (unwinding quantitative easing [QE]).

It will ‘soon be appropriate’ to tighten up a bit, said the Fed.

Or maybe not. GDP growth fell in the first quarter. And inflation fell last month, suggesting that it may not be appropriate after all.

Second, President Trump’s budget proposal got some attention.

Dead before arrival,’ says our friend David Stockman, who served as President Reagan’s budget chief. David:

There’s no way Trump will be able to ram any meaningful cuts through the congressional meat grinder, no matter how fiscally sound. The Dems and their media accomplices are already denouncing the Trump budget for shredding the safety net and attacking the poor.

Congress, including most Republicans, will not go along with cuts in Social Security disability or over $600 billion in Medicaid cuts over the next 10 years, just to name some of the proposed reductions.

But what did you expect?

The Donald’s budget has some good ideas…some bad ideas…and some ideas that make you wonder. But it doesn’t matter. The Deep State, not the White House, controls the budget process.

Since the election of George W Bush, insiders make sure that all major constituents of the Imperial Establishment get their money.

No crony left behind!

So let’s move on…

Two and twenty

Yesterday, we looked at how expensive mutual fund management fees can be.

2% doesn’t seem like much. But if you’re making only 4% a year, you’re giving up half your gains to the manager.

Hedge funds — which are free to use various strategies such as betting stocks will fall — are even worse. They charge 2% on the principal plus 20% of the profits.

Imagine you begin with $100,000 and the fund loses 50% one year and makes 50% the next. You’re even, right?

Very wrong.

The manager took $2,000 for his fee. Plus, you lost $50,000. So you end the first year with $48,000.

The following year, you see a gain of $24,000. But you give 20% of that to the manager…plus the 2% management fee.

You end up down more than $40,000…after paying nearly $8,000 to the manager.

Stick with that deal long enough and the manager will have 100% of your money.

Super-investor Warren Buffett says most people would be better off avoiding these costs…and the risk that the fund manager is a dud…by buying a low-cost ETF that tracks the performance of the S&P 500.

You could also avoid the management fees by simply buying shares in Buffett’s investment firm, Berkshire Hathaway. You get to invest alongside the world’s greatest investor…at zero cost.

Gold shines

But that doesn’t mean you’ll make money with Buffett. Over the past 20 years, Berkshire Hathaway failed to beat the return from 30-year US Treasuries.

What? How could that be?

Following the 2008 crisis, the Fed bought long-term Treasuries as part of its QE program, driving up prices. Even Buffett couldn’t keep up.

But wait, there’s more.

Guess what beat BOTH long-term Treasuries and Buffett…with zero management fees…and near-zero risk.

And before we open the envelope, consider that this was a period in which every major central bank was pushing up bond prices directly with $12 trillion in newly created money.

…a period in which the Dow tripled…

What beat stocks and bonds? Can you guess?

Gold, with an annual return of 7.6%. Go figure.


Our guess is that however well stocks have done in the last 20 years, they won’t do anywhere near as well in the next 20 years.

ETFs account for about $2.15 trillion worth of US stocks. And 27% of stock market trades are now done by ‘quant’ hedge funds — that is, funds run by computer algorithms.

Both are more or less on ‘autopilot’…and both are subject to violent downdrafts. In other words, neither of these are patient, long-term, value-oriented investors.

ETF buyers are gambling on ‘the stock market’, not investing in the businesses that happen to be traded in a market.

Similarly, quant funds are indifferent to the underlying companies and the values they represent. And typically, they work on formulae that call for rapid sales when stock prices fall below certain thresholds.

Rapid selling could be a problem, too, for index-tracking ETFs. Because everyone is investing in the same index funds at the same time.

When those indices fall hard enough, everyone is going to be panicking at the same time. This will increase selling pressure…and cause even steeper declines.

So the difference between an ETF and a hedge fund may only be time. With the latter, you lose money little by little; with the former, you could lose it all at once.


Bill Bonner,
For Markets & Money

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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