Buffett and everything else versus gold
Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 14th June 2012.
We discussed Warren Buffett's illogical opinions about gold in our 15th February 2012 report under the heading "Buffett's Blind Spot". Today we are going to take a quick look at Buffett's personal war against gold from a different angle and arrive at conclusions that might surprise you.
(Click on image to enlarge)
A chart like this says that it was right to be bullish on gold versus BRK ten years ago, but what does it say right now? After all, didn't eager participants in the NASDAQ bubble use similar charts/reasoning in 1999-2000 to 'prove' that Buffett was out of touch?
With regard to the correct positioning right now, the chart says either nothing at all or that BRK is now cheap relative to gold and will likely outperform in the future. What it absolutely does not say is that this is a good time to favour gold over BRK.
In general terms, great past performance by any investment is NEVER a good reason to buy that investment in the present. It could, however, be a good reason to sell. Additionally, when bears cite a long-term historical decline or bulls cite a long-term historical rise to justify their current stance, a major trend reversal could be just around the next corner. Always keep in mind that the last cycle's big loser stands a good chance of being the next cycle's big winner, and that one of the surest ways to generate bad investment performance is to apply during the current cycle the approach that worked the best during the preceding cycle.
Further to the above, we confess that when we see gold bulls citing gold's terrific past performance against Buffett's BRK or against anything else as a reason to be bullish on gold today, our inner contrarian gets a little nervous. It's almost a 180-degree turn from the late-1990s and early-2000s when many commentators would cite gold's lousy 20-year record as a reason to be bearish about the metal's future prospects. It didn't occur to them that lousy performance over the preceding 20 years was a large part of what made gold a wonderful long-term investment opportunity in the present. And it doesn't seem to occur to many gold bulls today that great performance over the past 10 years is, if anything, a reason to be circumspect when considering gold's likely future performance.
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