General Guidance for Stock Investing

Determining the Price of Gold and Stocks

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Executive Summary


Warren Buffett makes 12 million dollars in 3 hours.


The way he does is neither through fixed dollar investments nor short-term bonds. For him, the alternative is income producing assets of one sort or another that are not fixed-dollar type of investments. In the last 2 years, Buffett has been vocal that he vastly prefers old common stocks than fixed-dollar investments for five or ten-year period.


Investment is looking for something where you spend money to buy assets today, and those assets would give back more money over time. There are two types of assets to invest in. First is the asset itself delivers a return to you. Second is the asset that you hope someday somebody else pays you more later on. Between the two, Buffett will choose the first.


Buffett bought a farm 30 years ago. He looked at what it could produce every year. Providentially, it produced very satisfactory amounts of what he paid for. This is an example of asset 1.


The problem with commodities is you’re betting on what somebody else will pay for in 6 months. The commodity itself isn’t going to do anything for you unless you move. This is the second asset.


For instance, Buffett has a piece of art. It may go from a thousand dollars to fifty million dollars, but it still depends on what the next guy wants to pay him at it. The art itself, the painting, is not going to dispense cash. Buffett has to find somebody who’s going to like it more and trade it.


Currency gets worth less. It does not improve the service or the good that is really needed by other people. That’s why Buffett likes businesses or earning power as the best asset in the time of inflation. They can’t be taken away.

Full Text


Warren Buffett makes 12 million dollars in 3 hours. How does he do that?


There are periods when financial assets are great – early 80’s to 2000s – and there are periods when financial assets are down. Buffett makes money not only when it’s high or when it’s low. The way he does is neither through fixed dollar investments nor short-term bonds. For him, the alternative is income producing assets of one sort or another that are not fixed-dollar type of investments. In the last 2 years, Buffett has been vocal that he vastly prefers old common stocks than fixed-dollar investments for five or ten-year period. He does not bother about the next 5 hours or the following 5 days.


Investment is looking for something where you spend money to buy assets today, and those assets would give back more money over time. The problem with commodities is you’re betting on what somebody else will pay for in 6 months. The commodity itself isn’t going to do anything for you unless you move.


There are two types of assets to buy:


  • 1 The asset itself delivers a return to you – rental properties; stocks; a farm

  • 2 The asset that you hope someday somebody else pays you more later on – gold; jewelries

  • Asset 2 doesn’t produce anything unless you move, unlike asset 1. Those are two different games. Asset 2 is a game of speculation. There’s nothing immoral in speculation, but it is an entirely different game. To buy a lump of something and hope that somebody else pays you for that lump 2 years from now is like betting. It’s a higher risk. To buy something that you expect to produce income for you over time is also a high risk, but this one is better than the other.


    Buffett bought a farm 30 years ago. He looked at what it could produce every year. Providentially, it produced very satisfactory amounts of what he paid for. This is an example of asset 1.


    If the stock market closed for ten years, it wouldn’t bother Buffett, because he’s looking at what his business produces. Those are the kinds of assets he’d like to own – something that will deliver expectations over time.


    For instance, Buffett has a piece of art. It may go from a thousand dollars to fifty million dollars, but it’s depending on what the next guy wants to pay him at it. The art itself, the painting, is not going to dispense cash. Buffett has to find somebody who’s going to like it more and trade it.


    An asset like gold is a way of stirring fear, and it’s been pretty good from time to time. However, traders involved in gold have keep on hoping that people will be more afraid in 2 years than they are now. If people got more afraid, the traders get more money. If people got less afraid, traders get less money. Nonetheless, the gold itself doesn’t produce anything by itself.


    Buffett can’t comment too much about the future of gold, because he isn’t sure where the industry is going. But with cotton, he can. The world uses a lot of cotton. He has seen it go from $.80 to $1.90. The world also uses a lot of copper and he has watched it go from $2 to $4. There are all kinds of things in this world that go up and down in price. The real test to find out whether a stock is good to invest at or not is if the investor would be happy if it never got courted again in terms of what the asset did for him. According to Buffett, all the gold in the world would roughly make a 67-foot cube. At today’s market prices, the 67-foot cube of gold is about 7 trillion dollars. An amount of 7 trillion dollars is about 1/3 of all the stocks in the United States. Anyone has a choice of owning all the stocks in the United States or owning all the gold in the world. Even so, the gold can’t do anything but shine.


    For 7 trillion dollars, there are also roughly a billion acres of farm land in the United States Between looking at a 67-foot cube of gold and having all the farmland in the country, of course, Buffett would choose the farm land!


    If Buffett had tons of wealth, why does he still wait for stocks to go on sale? Simply because it makes things easier. It is rare to find something selling into tens of billions of dollars. Some businesses want to join the management with Berkshire. However, prices aren’t feasible most of the time, because it happens more often when stocks are depressed.


    Even though stocks went double two years ago, stocks were really stuck back then. They’re not as cheap now as they were then, but compared to most assets, they look attractive. It is not the level of the stock market that’s scaring. It’s tougher to find appropriate acquisitions. Getting paid back in investments in dollars will be much less in the future. The policy makers are going to get it eventually, or else paying for money is not going to be worth anything.


    If you have something valuable to offer even if the dollars are worth less, you retain earning power that commences purchasing power. The dower has deprecated 94% in Coca Cola more than 80 years ago. It’s 16 for 1 in terms of inflation. However, Coke owners in 1930 had still done pretty well compared to lots of businesses, because they had the ability to extract real earnings than what they delivered to people.


    Currency gets worth less. It does not improve the service or the good that is really needed by other people. That’s why Buffett likes businesses or earning power as the best asset in the time of inflation. They can’t be taken away.