Buffett on why gold is a poor investment

In 2011 and 2012, Warren Buffett made statements most people didn’t like.

“One thing I would bet my life on is that over a fifty-year period, not only will Berkshire do considerably better than gold, but common stocks as a group will do better than gold, and probably farmland will do better than gold.”

Then he explained why:

“If you own an ounce of gold now and you caress it for the next hundred years, you’ll have an ounce of gold a hundred years from now. If you own a hundred acres of farmland, you’ll also have a hundred acres of farmland a hundred years from now and you’ll have taken the crops for a hundred years and sold them and presumably bought more farmland in the process. It’s very hard for an unproductive investment to beat productive investments over any long period of time.”

Gold just sits there.
Farmland produces for a century and lets you reinvest along the way.

He draws a clear difference between productive and unproductive assets:

“Anytime you buy an asset that can’t produce anything, you’re simply betting on whether somebody else will pay more for it in the future. That’s different from assets that you can value based on what they will produce, what they will deliver. You buy a farm because you expect a certain amount of corn, soybeans, cotton, whatever it may be, to come your way every year. And you decide how much you will pay based on how much you think the asset itself will deliver over time. Those are the assets that appeal to me and Charlie.”

That’s the core insight:

• Productive assets can be valued by what they deliver over time.

• Unproductive assets depend on someone else paying more later.

Then he talks about how people react:

“It’s interesting: But if you say anything negative about gold, it arouses passions with people, which is kind of fascinating, because usually if you thought through something intellectually, it shouldn’t really make much difference what people say. The question is whether your facts are right and your reasoning is right. But you run into people who are really excited about gold … My dad loved gold. But he was tolerant, he could take a discussion of it. I find many people have trouble with it.”

Two more insights sit here:

1. You should be able to discuss your position without feeling personally attacked.

2. The only questions that matter are:

   • Are my facts right?

   • Is my reasoning right?

That’s how I think about my own investing now:

• Prefer assets that produce cashflows I can roughly estimate.

• Be wary of assets that only move because someone else is more excited or afraid.

• Hold positions because the facts and reasoning still make sense, not because other people agree.

On Monday

Look at what you own and, for each asset, write down:

1. Does this thing produce anything (cash, output, rights to a stream of earnings)?

2. Or am I mainly hoping someone will pay more for it later?

The first bucket is your productive assets.
The second is your speculation.

Buffett’s point is simple: over long periods, it’s very hard for the second bucket to beat the first.

Best,
Harsh

I build businesses with extraordinary people.
I share what I’m learning with people who build and run companies.

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