Has Buffett Got the Money? Or has the Money Got Him?

— What is going on over at Berkshire Hathaway, Warren Buffett’s famous investment company? As you probably know, Warren in getting on a bit and is looking to hand over the reigns soon.

— But his favoured successor, Dave Sokol, just resigned under the strangest of circumstances. Check out Warren’s press release.

— The first part of the letter tells us why Dave resigned…it was a decision he had been mulling over for some time and had actually tried to do before. But each time Warren persuaded him otherwise. As a result, Warren says, Dave contributed massively to the wealth of Berkshire shareholders.

— With the niceties over, Warren then launches into what is perhaps the real reason for the resignation – a weird story of trading in a company’s shares (by Dave) just before he brings the investment idea to Warren. Initially, the Oracle says he wasn’t interested. But after Dave communicated the details of a conversation he had with the company’s CFO, Warren’s ears pricked up.

— Now nothing, apparently, improper went on here. Buying shares in a company and having an interesting conversation with a CFO isn’t necessarily trading on insider info. But the press release inferred Warren was quite happy to accept Dave’s resignation this time given the strange circumstances that preceded it.

— This is classic passive/aggressive Buffett. On the one hand he makes it clear how valuable Dave was and on the other makes a veiled (sort of) implication of improper conduct by his lieutenant Dave Sokol.

— If you’ve read Snowball, Warren Buffett and the Business of Life, you probably won’t be too surprised by these events. Buffett only views relationships in a monetary sense. He is all about brand equity, whether it’s personal or a company brand.

The press release is an attempt to reinvest in the Buffet brand equity by implying he is willing to let someone as talented as Sokol go for even a whiff of impropriety. Not that that was what he said.

— But the reality is Buffett appears quite happy to trash a former colleagues’ personal equity to add to his own.

— And as well he might. Despite his best attempts, brand Buffett has taken a bit of a battering these past few years. Punting on a government rescue of the banking system in 2008 (and helping to make it happen through his weighty advice) followed up by gratuitous share market cheerleading, has hardly endeared Buffett to his traditional army of (non-Berkshire shareholding) fans.

— We’re not sure whether this letter will garner much more endearment though…it’s a little too transparent for that.

— Being good for goodness’ sake is a little different to being good for the express aim of making money. A critical reading of Snowball tells you that Buffett worshipped at the altar of money – not for material gain but for the sole purpose of accumulation. Hence the title – Snowball.

— Not that there is anything wrong with that. In fact, investing (or compounding one’s wealth, as Buffet would put it) is much better than consuming it. Investing (properly done) creates wealth, consumption depletes it.

— But pondering Buffett’s personality and undoubted achievements in the world of investing, combined with the difficulty he seemingly will have in handing over the reigns of Berkshire Hathaway, makes us think of the anecdote at the beginning of Peter Bernstein’s, The Power of Gold:

‘About a hundred years ago, John Ruskin told the story of a man who boarded a ship carrying his entire wealth in a large bag of gold coins. A terrible storm came up a few days into the voyage and the alarm went off to abandon ship. Strapping the bag around his waist, the man went up on deck, jumped overboard, and promptly sank to the bottom of the sea. Asks Ruskin, “now, as he was sinking, had he the gold? Or had the gold him?”’

— Will the colossal weight of Berkshire’s capital drag Buffett down too? Who knows, but the clouds do seem to be gathering.

— It won’t be the gold that gets Warren though. Gold for him is largely denominated in greenbacks. As much as he loves money, he doesn’t understand what it is. He understands valuation and adding economic value better than anyone else in the world, but he doesn’t grasp the point of money being a store of value.

— That’s why, unlike his father, he doesn’t understand or invest in gold. It doesn’t work into his compounding, or snowballing, plans. But we’re pretty fond of it here at the Markets and Money. It’s the one asset that will protect your wealth in an unstable monetary world.

— Good quality and good value companies will also protect and grow your wealth. But on the value front, there are not many candidates at the moment. The market is trading on the expectation of a never-ending supply of liquidity, not fundamentals that recognise cyclicality.

Diggers and Drillers editor Dr Alex Cowie is a fan of gold right now too. He has spent the past week over at the Mines and Money Conference in Hong Kong. Read on for Alex’s summary of the conference, and what he’s currently getting worked up about…

— Hong Kong’s ‘Mines and Money’ conference took place last week.

— As editor of Diggers and Drillers, I had a great time there looking for new stories for readers. It’s also a great chance to catch up with the companies that are current recommendations, and hear how everything is going back at site.

— An event like this held in Asia is also one of the best places to take the industry’s pulse. How bullish are the companies feeling? About 150 junior mining companies were present, mostly from Australia and Canada.

— They all seemed to be in great spirits. Their lifeblood of equity capital funding is the best it’s been in a while, and Asian markets were keen to get involved. Strong commodity prices are filling their sails as well. The atmosphere in the room was positive, without being feverish.

— It’s in their interests for companies to seem bullish of course, but many of the visitors at the conference were fund managers. They’re paid to be fussy about where they put their client’s money, so my conversations with them should in theory be more objective. And I’ve got to say they were in the same happy camp as the companies. The ‘fundies’ had a pretty positive view of the road ahead.

— That’s not to say both groups are correct – companies and fundies have certainly both got it wrong before! But come rain or shine, one of the best performing commodities in the last decade has been gold and there was a strong contingent of gold companies presenting. Explorers, developers and producers were on show, coming from Australia as well as exotic far flung corners of the globe.

— I promised readers of Diggers and Drillers that the next newsletter would be a gold edition. I came back from the conference with a few new ideas to add those I was already working on, and I’m now doing the hard yards to get the newsletter out as soon as possible. There are so many good companies out there right now, that I’m considering tipping a few of them, rather than the traditional one.

— Gold is not the only precious metal and there was also quite a bit of discussion about silver’s outstanding performance recently. The price has already doubled to US$37 within a year. The founder of ‘Silver Investor’ presented at the conference, and made a strong case for it to quickly run to $100. I’d be happy with $50, but can also see it going much further. We have two good silver recommendations on Diggers and Drillers already, but maybe it’s time for more.

— It wasn’t just precious metals companies there – far from it. Industry’s building blocks such as coking coal, iron ore and copper were represented by some great junior mining companies. I’ve got enough nuts and bolts research to keep me busy for months!

— This is how I like it though! This is a very exciting time to be writing about small cap mining stocks. Bernanke can’t ‘print’ gold, silver, copper or coal, one good reason for their prices to keep rising as real assets. Another is the fact that the global economy needs these commodities if it is to keep growing. The years of rebuilding now generated by the tragic events in Japan will only add to the strong demand in an already tight commodity market. Commodity prices back on the up despite having everything but the kitchen sink thrown at them in recent months.

— Conferences like these are great places to hear new stories, and I add to this by meeting companies for presentations and going on site visits to mining projects when I can.

— It’s an exciting time to be researching this corner of the market. It’s actually not too hard to find good opportunities at the moment. But my goal is to find the best opportunities for Diggers and Drillers readers!

— I’ll have a better idea once I’ve ‘kicked the tyres’ properly but it looks like the short-list could keep the recommendations coming for a few months at least.

— It’s been big week in Hong Kong! I’ll have to make sure I’m better rested before next year’s conference!

Dr Alex Cowie

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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reins, not reigns

Although the latter has a certain snarky charm.

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