While I don’t pay close attention to the stock market, there are a few rare exceptions that are worth noting. One of them is Warren Buffet’s Berkshire Hathaway. Buffet and his partner Charlie Munger don’t invest in the stock market. They buy companies, and happen to trade the shares through the stock market if they’re publicly traded companies.
Berkshire Hathaway filed their 13F form with the SEC for the past quarter ended June 30. In that form, they disclose their holdings. From that form you can compare their current holdings with the previous period. It’s an exercise in addition and subtraction to figure out what they did during the quarter.
There are a few items that are noteworthy from that report.
BH unloaded more than a quarter of its stake in Wells Fargo. They also sold about 61% of its position in JPMorgan Chase, and dumped its entire stakes in Goldman Sachs. They also sold their stake in PNC Financial.
Finally, they also exited their holdings in the airline industry including American Airlines, Delta Air Lines United Airlines and Southwest Airlines.
It marks a rare moment when BH has lost money on an investment.
So that’s what BH is getting out of. What’s interesting is what BH has been buying over the past 90 days. They spent $563 million on a position in Barrick Gold. While the position is only about a 5% stake in the company, there are a few things significant about this.
- When you are buying a gold mining company, you’re really buying gold at a discount. The process of mining gold only makes sense if the cost of getting the gold out of the ground is substantially less than the cost of buying gold on the open market. The recent run up in gold prices makes this an even better buy.
- The disclosure is only reporting the purchases up to June 30. Another 6 weeks have passed and it’s likely that they have increased their ownership position since then.
Barrick is a well managed company. They don’t take a ton of risk when it comes to exploration. They take a disciplined approach to mining.
So Buffet has decided that the airlines are going to take far too long to bounce back to invest in them. The banks and financial services represent a sizeable downside risk as we go through this economic cycle.
Gold is a good buy. When you buy anything, the idea is to know what it’s worth when you buy it.
For example, I can value an apartment building based on rents, expenses, and market cap rates. The analysis is never perfect, but I can project future cash flows and market-based asset prices, and derive an appropriate value for what an asset is worth.
But gold does not intrinsically generate cash flow like a business or rental property, so that analysis doesn’t work.
People often try to predict the price of gold by examining certain financial benchmarks.
For instance, in theory there are some loose relationships between the gold price and the money supply. But these relationships are far from perfect.
There’s another theory that gold prices increase because the dollar is weak. But this relationship is also far from perfect.
Finally, there’s a theory that the gold price is correlated with ‘real interest rates’, i.e. the rate of interest after adjusting for inflation.
This relationship is also far from perfect;
The bottom line is that there’s no magic formula to tell us what the gold price should be. Dollar weakness, real rates, and money supply are all useful indicators. But they’re not predictors.
For the most part, the price rises when people lose confidence in the financial system, in their government, in their central bankers, or in each other. And that’s what we’re seeing now.
Ignore Warren Buffet at your peril.