Warren Buffett , theCEO of
Berkshire Hathaway (NYSE: BRK-A)
, is currently worth about $44 billion, according to Forbes' list
of the world's richest people. This makes him the world's
third-richest person, behind Bill Gates and Carlos Slim.
Buffett is famous for some greatstock picks over the years --
Coca Cola (
American Express (
, each having increased more than 110% in the past 10 years
But the Oracle of Omaha is also well known for avoiding
certaininvestments -- especially gold.
While he's is quick to point out that gold has served some
investors well, particularly during times of highinflation ,
Buffett has never warmed up to gold as aninvestment .
The answer has to do with the difference between what Buffett
calls productive versus nonproductive assets.
He considers gold a nonproductiveasset because it doesn't
produce anything of value. To illustrate this point, Buffett
proposed this thought experiment in his 2011 letter to Berkshire
"Today the world's gold stock is about 170,000 metric tons.
If all of this gold were melded together, it would form a cube of
about 68 feet per side. (Picture it fitting comfortably within a
baseball infield.) At $1,750 per ounce -- gold's price as I write
this -- its value would be $9.6 trillion. Call this cube pile
"Let's now create a pile B costing an equal amount. For that,
we could buy all U.S. cropland (400 million acres with output of
about $200 billion annually), plus 16 Exxon Mobils (the world's
most profitable company, one earning more than $40 billion
annually). After these purchases, we would have about $1 trillion
left over for walking-aroundmoney (no sense feeling strapped
after this buying binge). Can you imagine an investor with $9.6
trillion selecting pile A over pile B?
"A century from now the 400 million acres of farmlandwill
have produced staggering amounts of corn, wheat, cotton, and
other crops -- and will continue to produce that valuable bounty,
whatever thecurrency may be. Exxon Mobil will probably have
delivered trillions of dollars in dividends to its owners and
will also hold assets worth many more trillions (and, remember,
you get 16 Exxons). The 170,000 tons of gold will be unchanged in
size and still incapable of producing anything. You can fondle
the cube, but it will not respond."
So, instead of nonproductive assets such as gold, Buffett
prefers productive assets like farmland or companies that generate
enormous wealth for shareholders -- companies like
Exxon Mobil (
, Coca-Cola or See's Candy.
And he clearly explains why:
"Our country's businesses will continue to efficiently
deliver goods and services wanted by our citizens.
Metaphorically, these commercial "cows" will live for centuries
and give ever greater quantities of "milk" to boot. Their value
will be determined not by the medium of exchange but rather by
their capacity to deliver milk. Proceeds from the sale of the
milk willcompound for the owners of the cows, just as they did
during the 20th century when the Dow increased from 66 to 11,497
(and paid loads of dividends as well).
"I believe that over any extended period of time this
category ofinvesting will prove to be the runaway winner… More
important, it will be by far the safest."
This last sentence is important. Investing in productive assets
carries less risk.
That's because, in the past,irrational exuberance has caused all
sorts of nonproductive assets to suddenly skyrocket beyond any sane
measure ofintrinsic value . The run-up on the prices of tulips in
the 17th century is one colorful example.
Action to Take -- >
In contrast to the "boom and bust" cycle seen in commodities like
gold (or tulips), productive assets will never go "out of style,"
as Buffett says.
After all, people will always need goods, consume food and
require a home to live as they do now. In Buffett's own words,
"People will forever exchange what they produce for what others
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