This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 50,000 other investors today.
To investors,
News broke late Friday that Warren Buffett’s Berkshire Hathaway made some big investment decisions during the second quarter of 2020. This shouldn’t be that shocking given the market volatility and a significant shift in the macro environment due to the COVID-19 crisis. However, what was surprising was the specific investments that Berkshire and Buffett decided to enter and exit.
Here is a quick summary of the most notable decisions:
Berkshire bought 20.9 million shares in Barrick Gold, a Toronto-based gold miner, which was a $563.6 million investment at the time it was reported
Berkshire sold 85.6 million shares of Wells Fargo, which is approximately 26% of the previous ownership position
Berkshire sold 35.5 million shares of JPMorgan, which was approximately 60% of the previous ownership position
Berkshire completely divested of their financial stake in Goldman Sachs
Berkshire continued to invest in Bank of America and now owns almost 12% of the financial services company, which is worth about $28.2 billion
Warren Buffett and his team have essentially decided to dump bank stocks and start gaining exposure to gold. This is a complete U-turn from the perspective Buffett has publicly stated for many years, which downplayed the value of gold and boasted of the banks’ future prospects. So what exactly is driving this change of opinion?
Many people are speculating that changes in the macro environment are to blame. That thought process would include the following:
COVID-19 created a public health crisis
Governments had to respond, so they forced everyone to sit in their homes
The velocity of money drastically slowed while everyone was sheltering in place
Governments realized that they could mitigate the short term pain if they intervened
That intervention was produced in the form of trillions of dollars in quantitative easing
If governments are printing trillions of dollars, there will be high levels of inflation in the future
Gold will be a great inflation hedge asset to put in your portfolio, so that is what Buffett did
This thought process has many valid arguments, but there is only one major problem — Warren Buffett and Berkshire Hathaway did not buy gold. They bought equity in Barrick Gold, which is a gold miner. This is an investment in a cash producing business, rather than an investment in the precious metal. Now before everyone freaks out, yes, the future prospects of Barrick Gold are partially dependent on the future performance of gold. But it is important to call out that the investment Buffett made was in a business, not a commodity.
So if he is not actually buying the commodity itself, why would Buffett be buying into a gold miner?
An easy first place to look is the poor performance of Berkshire Hathaway’s top 10 stock holdings. As of August 10th, here they are ranked by portfolio percentage (largest to smallest) and their financial performance year-to-date:
Apple +54.4%
Bank of America -23.6%
Coca-Cola -12.3%
American Express -17.3%
Kraft Heinz +10.8%
Wells Fargo -52.0%
Moody’s +14.7%
JPMorgan -25.9%
U.S. Bancorp -35.4%
Bank of New York Mellon -22.8%
According to Yahoo! Finance, “the seven financial stocks have an average year-to-date total return of -23.2%, 40 basis points less than Bank of America’s total return so far in 2020. The three non-financial stocks have an average total return of 17.6%, primarily on the back of a fantastic performance by the maker of iPhones.” The quick takeaway is that Buffett has been invested in a number of old-school businesses that have not been able to convince the public markets of their technology prowess.
In fact, the most technologically innovative business that Berkshire is invested in has been their best performer — shocker! When your portfolio is being crushed this bad, it forces people to reevaluate their strongest held beliefs. I have no doubt that the investment team at Berkshire Hathaway has been discussing what they can do to mitigate the potential risk from high inflation in the coming years. If that conversation has been occurring, the natural conclusion in the conservative world of Wall Street is to gain exposure to gold.
Buffett has preached for decades about his disdain for non-cash producing commodities, so it makes sense that they would get indirect exposure to gold through a gold miner. But ultimately this is still a less superior decision than the one that Paul Tudor Jones made just a few weeks ago. Warren Buffett and Berkshire Hathaway have chosen to gain exposure to gold in the fcae of potential inflation and Paul Tudor Jones chose to get exposure to Bitcoin because it is likely to be the “fastest horse.” So what exactly is the difference between gold investors and Bitcoin holders?
The good news is that both groups have a general agreement on the myriad of issues related to quantitative easing, central banks, and future inflation. They each also agree that sound money principles are the best solution to not only protecting one’s wealth, but also benefitting from the devaluation of the US dollar. But that is where most of the agreeing stops.
Gold bugs and Bitcoiners are both incredibly staunch in their belief that each respective asset provides the best application of sound money principles moving forward. Yes, you read that right. Even though each group agrees on sound money, they are actually disagreeing on the application of those sound money principles as the vehicle for people to use. It is important that I call out my bias here — I’m a relatively young guy who is excited about innovation and technology.
It is no secret that I’m strongly in the Bitcoin camp on this debate, but I’m going to do my best to provide an honest assessment of the two assets. First, gold has been around for thousands of years and Bitcoin is only approximately 11 years old. The Lindy Effect is much more in gold’s favor, but Bitcoiners would argue that every great innovation was young at some point too. This difference of time in existence has much more of an effect on confidence levels, rather that actual properties of the assets themselves.
Here is a quick rundown of each aspect to consider:
Scarcity – It is becoming abundantly clear that Bitcoin has provable scarcity and gold does not. There are 21 million Bitcoin in the total supply (hard cap on that number) and there are just over 18.4 million Bitcoin in the circulating supply. These numbers are provable in the Bitcoin code base and by simply syncing a Bitcoin node to the network and querying for the data. Gold has an estimated total supply and circulating supply, but no one knows the exact numbers of each. They also can not prove either gold number either.
Portability — Gold is heavy and difficult to move in any serious size. Bitcoin is a fully digital asset, so it can be moved anywhere globally almost effortlessly.
Divisibility — Gold is difficult to divide into smaller amounts than you are currently holding. You could shave some off or have your gold bar professionally broken down, but it would be nearly impossible to do risk-free yourself. A single Bitcoin, on the other hand, is divisible by 100,000,000 fractional units called satoshis. This makes it infinitely easier for someone to use Bitcoin for transactional purposes compared to gold.
Physical applications — Gold is well known for it’s resistance to corrosion and rust, while also serving as a great conductor of heat and electricity as well. Bitcoin has none of these elements, nor does the Bitcoin community believe these properties are important for determining superior money.
So in a short sentence, Bitcoin is superior to gold in almost every facet except how long people have accepted the asset as money and any physical applications around corrosion and conduction. But as I previously stated, Bitcoin wins against gold when presented side-by-side for any comparison that involves true importance for money.
This game doesn’t have to be zero sum though. In fact, I believe that Bitcoin and gold are both going to do well in the coming years as we see high levels of inflation and investors look for inflation-hedge assets. With that said, I’m with Paul Tudor Jones. I believe Bitcoin will be the fastest horse and investors will be upset if they have zero exposure to the asset. It is not lost on me that many investors are now going to look at gold because Warren Buffett’s exposure has essentially de-risked the asset for other investors. No one will get fired for copying one of the greatest investors of our lifetime.
Here is my word of caution though — Warren Buffett is probably not the person you want to be copying based on his performance over the last decade. He has struggled mightily to beat the S&P 500 annual returns. He also recently sold his airline stocks near the market bottom in a panic, while choosing to buy gold near it’s all-time high. Maybe the airline stocks go lower and gold goes higher, but these two investment decisions go against everything Buffett has ever taught us about value investing. The game is to buy low and sell high, not sell low and buy high.
I am a big fan of what Warren Buffett has done over the past few decades. He not only displayed one of the greatest investment track records in history, but he educated an entire generation in his well-known pragmatic fashion. My belief is that Warren Buffett and Berkshire Hathaway should have taken 5-10% of their entire cash position and purchased Bitcoin. It would likely serve as their best investment coming out of this economic crisis.
That scenario is nearly impossible to imagine though — Buffett has made his thoughts on Bitcoin clear. We shouldn’t be surprised when we see 89-year-olds resisting technological innovation. On the bright side, this just leaves more Bitcoin for the rest of us :)
-Pomp
This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 50,000 other investors today.
THE RUNDOWN:
Brainard Says Fed Is Conducting E-Money Tests for Research: The Federal Reserve is conducting experiments with a hypothetical digital dollar for research purposes, though it hasn’t yet committed to issuance that would require a formal policy process involving the government and other stakeholders, Governor Lael Brainard said Thursday. In addition to the Fed’s own internal work, research teams from the Boston Fed and Massachusetts Institute of Technology are engaged in a “multi-year effort to build and test a hypothetical digital currency oriented to central bank uses,” she said. Read more.
Pentagon Forms New Task Force to Investigate UFOs: The Pentagon is forming a new task force to investigate UFO sightings that have been observed on several occasions by U.S. military aircraft. The creation of the Unidentified Aerial Phenomena Task Force, or UAPTF, continues an effort begun in recent years to investigate unexplained aerial incidents encountered by the U.S. military. Read more.
Bitcoin To ‘Ignite’ After Labor Day, Warns Former Prudential CEO In Surprise Crypto Flip: George Ball, the chief executive of investment firm Sanders Morris Harris and former chief executive of Prudential Securities, has changed his tune on bitcoin, switching from being a bitcoin "opponent" to an advocate—and warning people will begin turning to bitcoin after Labor Day on September 7. "I’ve never said this before, but I’ve always been a blockchain, cryptocurrency, bitcoin opponent; but if you look right now, the government can’t stimulate the markets forever," Ball said, speaking to the newswire Reuters in a video interview this week. Read more.
The Pandemic is Prompting Asian Countries to Adopt Blockchain: The COVID-19 pandemic prompted many Asian countries to adopt blockchain technology to secure their data via the Internet against hackers and cyber thieves, according to a report from the Nikkei Asian Review. This increase in adoption comes as The Business Research Company said the global blockchain market is expected to hit $15.88 billion in 2023. Read more.
Music Is Big on Twitch. Now Record Labels Want It to Pay Up: Is it illegal to stream music on Twitch? Content creators can argue that based on how little music is being used and the context of the stream, some music streaming should be considered fair use and therefore not illegal. But the RIAA said it looks to see if a clip could be fair use before sending out its notices. Read more.
LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE
Pattie Sellers, an award-winning writer, producer, and multimedia journalist. She currently serves as the Co-CEO of SellersEaston Media and the Chair of the annual Fortune Most Powerful Women Summit, where she previously worked for 32 years. Pattie has spent more time with the world’s most successful and powerful people than anyone else I know. It was great to hear so many interesting stories.
In this conversation, Pattie and I discuss:
The world's most successful and powerful people
Warren Buffett
Ted Turner
Melinda Gates
John Mack
Martha Stewart
Rupert Murdoch
Oprah
Alex Rodriguez
What makes these people tick
The changing media landscape of today
I really enjoyed this conversation with Pattie. Hopefully you enjoy it too.
LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE
We have started a new show exclusive to YouTube called Lunch Money. The goal is to cover current events in business, finance, and technology from the perspective of the every day citizen, rather than the talking heads on television. It is just as funny and entertaining as it is educational. Hope you enjoy it and make sure you go subscribe to the YouTube channel!
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