Is this a good time to buy gold?
Not according to the world’s third-richest man, Warren Buffett. In fact, Mr. Buffett doesn’t care for gold as an investment at all, he told an audience of around 500 people in New Delhi on Friday night, even though gold is the favored investment for millions of Indians.
Mr. Buffett said that gold, oil and art are investments that don’t produce any income or product. So, investors who buy these are counting on them becoming more attractive to other people in the future. “That’s a whole different game” compared to investing, said Mr. Buffett.
He said if all the gold in the world could be condensed, it would be a cube which was 67 feet on all sides — enough to fit a large auditorium. But what can you do with this cube? “You can fondle it,” said Mr. Buffett, or stare at it, but it will not produce any returns. “You’re betting on the price of the asset not on the productivity of the asset,” said Mr. Buffett.
He said he preferred to bet on assets that are productive, like stocks of companies or farm land which produces crops.
These productive investments have helped the 80-year-old create vast wealth for himself, valued at nearly $50 billion, according to Forbes magazine.
Mr. Buffett shared some of his other investment mantras:
Picking the right stock
Mr. Buffett reiterated that he relies on principles taught by his guru, investor Benjamin Graham, who looked for stocks which were cheap compared to their worth. (Of course, the key is to figure out what the stock is worth, which is a subjective decision.)
Mr. Buffett said he doesn’t look at sectors to identify stocks.
Instead, he looks for companies whose business he understands, and where he sees income and growth potential for the next five, 10 or 20 years.
He gave the example of Coca-Cola, one of his holdings. What are the chances that Coca-Cola will be selling more products over the next several years? “It’s almost a certainty,” said Mr. Buffett.
In comparison, he has stayed away from some technology and social media companies like Twitter or Facebook, which operate in a fast-changing world where the future is not clear to him. Some of these companies will be very big winners but “most of them will turn out to be overpriced,” said Mr. Buffett.
He said he doesn’t have to be a part of all successful companies – he looks for only a few good investing ideas.
When to sell a stock?
This, he said, is a harder decision than buying a stock.
Mr. Buffett typically holds on to stocks for years and years. “I don’t feel like I have to grow rich in the next day or week,” said Mr. Buffett. He said that investors who track stock prices daily are being “just foolish.”
If they had bought a farm or an apartment, they would not expect it to appreciate the next day but over a period of time. Why treat stocks differently?
He added that while there’s no law against speculating, those investors would “make more money if they don’t trade as much.”
Mr. Buffett said he would sell a stock only if some better investment opportunity came about, or if something changed at the company, such as its management, which he didn’t approve of.
Get the investing mindset
A good investor needs reasonable intelligence and a passion for investing, said Mr. Buffett.
More important is the ability to look at the facts of an investment and evaluate them without getting influenced by what other people think. “You can’t get excited because other people are excited,” said Mr. Buffett.
He said that humans are susceptible to believing that something that has happened in the recent past will continue to go on. So, every now and then, there’s a craze to buy something even at very high, irrational prices. “Then all of a sudden, the music stops,” said Mr. Buffett, and the investment comes crashing down.
The key is to detach yourself from such a craze. Of course, that’s easier said than done.
The importance of being comfortable
Mr. Buffett usually keeps a few billion dollars as a cash cushion or “margin of safety” at his company, Berkshire Hathaway Inc., in order to tide over any potential economic or other crises. That margin also allows him to buy businesses which may become attractive during a downturn, he said.
Personally, he said, he doesn’t keep much cash but says individuals should hold as much cash in their portfolio as would keep them comfortable during tough times.
“Some people might do something very foolish if they didn’t have cash around,” said Mr. Buffett, presumably referring to selling stocks after they have lost a lot of value.
Why stocks matter?
To fight inflation.
“Inflation is a very cruel tax,” said Mr. Buffett, because it lowers the worth of your paper money.
He said one of the best ways to keep the value of your money growing is to invest in good businesses and companies which keep growing. That helps investors “maintain purchasing power no matter what happens to the currency,” said Mr. Buffett.
He advised against buying long-term bonds of any government, because both inflation and printing of new currency lowers the value of these investments.
The only better way to beat inflation, he said, is when individuals improve their earning power through further education and skills. “Maximize your talent,” said Mr. Buffett.
29th April 2011 Shefali Anand