Fantasy Lunch with Warren Buffett - We Talk About GoldMay 16, 2012, 5:31 PM
We didn’t win the $2.6 million bid for the power lunch with Warren Buffet. Truth is, we didn’t even bid. But that’s not going to stop us, the staff of Sunshine Profits, from imagining what it would be like to sit down for lunch with the planet’s third wealthiest person, the Oracle of Omaha, himself. This is the man whose Rule Number One is never to lose money, and whose Rule Number Two is never to forget rule number one. Maybe we can change his mind about gold and gain some nuggets of his wisdom. His views on gold are well known including his famous quote: “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
We arrive early at Manhattan’s steakhouse, Smith & Wollensky. We don’t want to be late to a lunch for which we had just paid $2.6 million. We study the menu while we’re waiting. At a rate of $21,666 per minute, every minute is precious, but it’s all for charity, so who is counting. We’ve already discussed some possible questions to ask, some macroeconomic questions such as, does he like China? Brazil? The eurozone? What about Treasuries and oil? Does he still believe in America? The only topic that is off-limits is his future investments.
There no point is asking about his investing secret; it’s well known-- buying great companies whose earnings are predicable at reasonable prices and holding them for a long time. (He’s owned some stocks for longer than most on our staff have been alive.) He was quoted as saying that it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
He arrives exactly on time, lean and affable, spry for an 80-year-old. There are smiles and handshakes all around and he puts us at ease. As we walk to our cozy, wood-paneled alcove we are aware of heads turning and whispers trailing us like the wake of a boat sailing the Hudson River.
We sit, the waiter pours ice water all around and Buffet gets right to the point.
“Why would precious metals analysts such as yourselves want to have lunch with me, knowing my views about gold?” he says, a teasing smile on his face. He’s obviously done his homework and knows what we do.
“Maybe by desert and coffee we will have changed your mind about precious metals,” I retort, smiling back.
He rises to the challenge, “Go for it,” but looks skeptical, like he is not expecting to hear anything new. “Listen,” he says. “The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you. It is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now, than it is to buy something that you expect to produce income for you over time.”
“It’s a matter of investing philosophy,” I reply. “It’s true that gold doesn’t earn you interest, but…”
I’m interrupted by the waiter bringing a basket filled with various kinds of breads, as he sets down the menus. The bread inspires me.
“Gold isn’t so much an investment as it is money and a preserver of wealth,” I say, reaching out for the basket, and I hold it up.
“See this bread?” I ask. “In Babylonian times, some 3,000 years ago, an ounce of gold could have bought you 350 loaves of bread.”
“And the point is…”
“That today, an ounce of gold will still buy you the same amount of good quality whole wheat bread. That’s over 3,000 years of wealth preservation,” I say and slather butter on a slice, as if to make my point. “That’s a nice suit you’re wearing,” I add gesturing to Buffet’s blue well-tailored suit. I know that the guy lives modestly, still in the same five-bedroom stucco house in Omaha that he bought in 1957 for $31,500, but the suit looks new, probably a Zegna. “I’m not going to ask you how much you paid for the suit. That would be rude. But probably something like an ounce of gold’s worth,” I say.
“I buy expensive suits,” says Buffet, a smile lighting up his face. “They just look cheap on me.” He delivers the punch line with perfect timing and looks pleased. We all laugh.
“Well, in Roman times, an ounce of gold would have bought you a toga of the first quality. Again, that’s a couple of thousand of years of a proven track record of wealth preservation.”
The waiter comes to take our order. Buffet orders his signature medium rare steak with hash browns, a side salad and a cherry coke. (Berkshire Hathaway is Coca-Cola's largest shareholder.)
“Look,” he says turning to me as soon as the waiter leaves. “If you’re going long on gold you are going long on fear. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.”
I let that sink in for a minute.
“There is plenty of fear out there and there is a lot more coming with the U.S.’s mountain of debt, the euro zone falling apart, the lingering effects of the Tsunami in Japan. You don’t have to be Dr. Doom and Gloom and dream about black swans at night to see that there are difficult times ahead. Gold is some of the best insurance you can have.”
“In the business world, the rear view mirror is always clearer than the windshield,” Buffet says. “None of us have a crystal ball. None of us know what will happen. I guess that means you like to buy gold and hold it. I guess it means that I like to buy good companies and hold them. When I buy a company I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. If a business does well, the stock eventually follows.”
“Our investment philosophies do not clash,” I say. “There should be room for both in any portfolio. Besides, just like gold has proved its mettle over thousands of years, you certainly have made your point with your Midas touch for picking stocks.”
“Do all your metaphors allude to gold?” he asks, amused.
We discuss what characteristics make for a good investor and agree that one needs to attain intellectual clarity and emotional detachment.
“Look at market fluctuations as your friend rather than your enemy,” says Buffet. “Profit from folly rather than participate in it.”
“We couldn’t agree more,” says one of my associates. “But sometimes these market fluctuations start off as your friends and very quickly turn on you and stab you in the back.”
We all laugh with remembered pain.
“If it were that easy, everyone would be millionaires,” Buffet replies. “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most investors have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hand.”
The waiter comes to get our desert order.
“Just bring one of each and lots of spoons,” Buffet says. The man knows how to enjoy the simple pleasures of life.
As we savor the deserts, (especially the Hot Deep Dish Apple Betty with vanilla sauce and Bourbon Pecan Pie) and linger over the coffee, Buffet gives us the benefit of his many years of experience and wisdom.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. Remember that you only have to do a very few things right in your life so long as you don’t do too many things wrong.”
As the lunch date begins to wind down he talks about the effects of aging. He delivers his last punch line and it’s a good one:
“I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death,” he says. “I have abandoned hope to give new meaning to the term ‘thinking outside the box.’”
We wish him good health and a long life and thank him for the privilege of breaking bread with him.
“Don’t listen to my prattle against gold,” he says as we shake hands. “I may be talking against it but you’re laughing all the way to the bank, so who is right?”
Sunshine Profits' Contributing Author