Warren Buffett and Charlie Munger provided plenty of food for thought for Australian investors at the weekend. Early on Buffett mentioned that Berkshire had made around $100m on foreign exchange transactions in 2010 in just two currencies.
Later he revealed that the Australian dollar was one of those currencies, a fact reported reported by several media outlets. But arguably the most interesting comment (heavily marked in my personal notes) came next.
Buffett feels the Australian dollar could be in for a huge movement, ‘and it could be quite dramatic in either direction. I don’t know which. That’s why (Berkshire no longer has a large bet).’
That struck me as quite a statement from a man whose tendency is to say less rather than more on such matters (Buffett typically prefers to stick with sharemarket and general business matters). Yet say it he did.
Vice-chairman Charlie Munger then added an open-ended comment to Buffett’s remarks; ‘Australia has these fabulous open pit mines, which (is great) when Asia is booming.’ This could be interpreted as him saying that Australia’s continued success is highly conditional on events in Asia; a topic Doddsvillagers have discussed at length in the past (see Commodity super cycle: No room for fence sitters and Chanos on China, for example).
If Asia’s development continues apace and America keeps printing money like there’s no tomorrow, it’s possible that another billionaire investor – Jim Rogers – might be right. Rogers has suggested the Australian dollar could reach US$1.40.
Yet it’s easy enough to see the downside; China could stumble, or our property prices might fall dramatically. Either of those eventualities would likely see the Australian dollar weaken markedly.
For those, like myself, who eagerly await any recommended reading from Buffett and Munger, the latter recommended a book about Google called In the Plex by Steven Levy, a long-time technology reporter.
Munger said he liked learning about engineering cultures that are ‘quite peculiar and interesting. Will I use it?’ he asked, Rudd-like, ‘probably not, but I enjoyed learning it and that’s important. You should aim to go to bed every night a little wiser than when you woke up.’ (After which Buffett quipped that he was ‘just trying to hold my own.’)
If you’re interested in the world of banking, Buffett recommended the annual reports of M & T Bank which feature commentary from its straight-shooting chief, Bob Wilmers. He also described the annual letter from JPMorgan Chase’s Jamie Dimon as a ‘tour de force on banking and the economy.’
Buffett also weighed in on commodities after one Berkshire shareholder complained that the company’s share price had barely kept pace with inflation since his purchase in 2006, while his gold holdings had performed spectacularly.
Buffett pointed out that when he took over Berkshire, its share price was equivalent to ¾ of an ounce of gold; ‘So gold – even at US$1,500 – still has a way to go’, implying a comparison with Berkshire Hathaway’s current price of more than US$120,000.
He could have left the topic there but, instead, he treated the audience to a succinct lecture on what he sees as the three categories of investments.
The first is anything denominated in a currency, such as cash, bonds or current accounts. ‘Any currency-related investment is a bet on how the government will behave in future,’ Buffett explained, citing Zimbabwe as an example.
The second category of investment is ‘items you buy that don’t produce anything but that you hope someone will pay you more for later on.’ He then spoke at length about the uselessness of gold.
If all the gold ever mined were melted into a single cube, it would be about 67 feet on each side and weigh around 165-167,000 metric tons. ‘You could climb on it, fondle it, polish it, stare at it. But it isn’t going to do anything. You’re hoping someone will buy it from you later on.’
The third category is productive assets. These are assets you can make a rational calculation about and measure whether their performance over time matches your initial expectations. Buffett advised that, over time, speculating in commodities has not been the way to get rich; owning good businesses has been.
This mini-lecture closed with a powerful illustration. Buffett said that all of gold ever mined, at today’s price, would be worth around US$8 trillion. He invited the audience to consider what else that amount of money could buy; all of the farmland in the lower 48 states (which Buffett put at US$2 trillion), 10 ExxonMobils (which boasts a market value of more than US$400bn) and you could ‘stick a trillion in your pocket for walking around money.’
While admitting to past investments in oil (at US$10 per barrel) and silver (which has industrial uses), Buffett took several other opportunities throughout the day to underline his preference for investing in productive assets over non-productive ones.
Another hot topic in the American media at the moment – the US debt ceiling – was also put on the agenda by a questioner. Buffett was adamant; not raising the debt ceiling ‘would probably be the most asinine act that congress has ever done … the U.S. is not going to have a debt crisis while we issue debt in our own currency.’
Buffett pointed out that the difference between being able to issue debt in your own currency and not ‘is night and day’. He mused further on the topic, saying ‘giving up the right to issue debt in your own currency is a huge step’ and then contrasted the situation in Japan (which issues debt in yen) with struggling European nations (such as Greece, which must be bailed out by the larger nations in their economic bloc).
Elsewhere in the meeting, when discussing the outcome of America rescuing its large banks and auto makers, Buffett observed that Europe is currently trying to figure out whether entire nations are ‘too big to fail’.
On a related topic, Buffett noted several times throughout the meeting that he fully expected the purchasing power of the US dollar to decline over time but that the same is true of virtually all paper currencies. It’s simply a matter of which currencies will decline more quickly than others. ‘I have fears – and I’ve long had fears – about a rapid depreciation (of the US dollar) … we haven’t had runaway inflation but I fear it.’
Do you have any questions about the meeting? I took more than 40 pages of (very messy) notes and will do my best to answer any relevant questions posted here.
(I’m currently holidaying in California but will aim to check Doddsville as frequently as possible over the next couple of days before heading into the wilds of Yosemite National Park.)