Mar 232012

In Warren Buffett’s letter to Berkshire Hathaway shareholders released in late February, 2012, Mr. Buffett expressed his skepticism with respect to the investment merits of gold.  He stated that gold is a favorite of investors who fear almost all other assets, especially paper money.  What motivates most gold purchasers is their belief that the ranks of the fearful will grow.  As “bandwagon” investors join any party, they create their own truth — “for a while“.  “What the wise man does in the beginning, the fool does in the end.”

At current prices, today’s annual production of gold would be valued at $160 billion.  “Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.”  The total current value of the world’s gold stock of $9.6 trillion “will compound over the (next) century at a rate inferior to that achieved by (productive assets such as farmland and large U.S. corporations such as Exxon Mobil).”

Even though gold currently sells for over $1600 per ounce, up from a peak of $1421 per ounce in 2010, its recent price history has been extremely volatile.  From price data that I have examined, gold reached a peak of $850 per ounce in 1980, and subsequently sold for as low as $264 in 2000.  It did not exceed its 1980 peak price until 2008, 28 years later.

I was quoted in an article on this topic (March 20, 2012) as follows:

The “Greater Fool Theory” is an investing idea that means people will buy something not because it’s worth a given price but because they feel that they will be able to sell it later at a higher price.  People who buy gold and silver expecting to sell it at a higher price, Kass said, are perfect examples of the theory.

Investing in gold and silver is purely speculative, he said.

From my perspective, I think it’s risky,” Kass said.  “There’s no guarantee that it’s going to go up, and if it does you don’t know what your rate of return will be.”

The entire article is available at:

This article has also been published in Forexpros:

 Posted by at 2:44 pm

Tom Gayner, President and Chief Investment Officer of Markel, Meets With University of Maryland Students

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Mar 092012

On Friday, March 2, 2012, Tom Gayner, the President and Chief Financial Officer of Markel, met with a group of University of Maryland undergraduate finance majors at his company’s offices in Glen Allen, Virginia.  (Markel is a property and casualty insurance company.  On average, 80% of Markel’s premiums cover insurance claims, 15% cover administrative costs, and 5% are profits.  Insurance companies invest “the float”, which are the premiums they collect prior to their claims being paid.)  Tom responded to student questions throughout our 1 1/2 hour meeting.

Tom mentioned that since his father was a CPA, and frequent conversations at home focused on businesses, Tom developed an early interest in this area.  His first job was as an accountant.  He shortly thereafter changed positions and became a portfolio manager at Markel.

Tom stated that there are four characteristics that he seeks when investing in common stocks :

(1) Companies with a proven track record of profitability over 5 – 10 years.  These companies should have a high return on capital and low leverage.  He drew an analogy between debt and aspirins.  Small quantities can be helpful, but too much can be fatal.  He does not follow Silicon Valley stocks.

(2) Companies with talented management teams with integrity.   Management teams receiving excessive compensation raise issues of integrity.

(3) Companies with reinvestment opportunities.  They should generate much of the capital that they require.

(4) Companies selling at a reasonable price per share.

In response to other student questions, Mr. Gayner stated the following:

— He spends most of his day reading newspapers and magazines.  He sometimes calls investor relations departments at various companies to ask questions.  It is important to have a network of smart friends who as allies will help each other with investment decisions.

–After getting a job, it is very important to be trustworthy.  Clients (or your employer) would then give you money to invest.  Tom is a continuous learner.  He likes to read how successful coaches (sports) and generals make their decisions.

–Sometimes Tom has invested in a stock that he thinks should be selling for twice its current price.  However, it may take as long as five years for him to be proven right.  One must keep clients and supervisors aboard during this period, especially, if the initial investment declines to 1/2 of its initial price.  If a mistake has been made, it is important to admit it.  Tom quoted Winston Churchill:  “When I make a mistake, I change my mind.  What do you do?”

–All businesses are hard.  General Motors went bankrupt.  There is more international competition now than ever before.  Caterpillar derives the bulk of its business outside of the U.S.  Honda receives a majority of its revenues inside the U.S.  The S&P 500 derives over 50% of its revenues outside of the U.S.  Markel receives 40% of its revenues outside of the U.S.

–In Berkshire Hathaway’s (Markel’s largest investment) 1990 annual report, Warren Buffett’s letter to shareholders mentioned that Berkshire was “topping out”.  Its stock price then was $5,750 per share.  (Today, those shares sell for approximately $120,000.)

–Tom relies on behavioral finance and does not look at beta to estimate the cost of capital.  In an example, his current estimate of 10% for the cost of capital of a firm reflected his estimate of the risk faced by the firm and low interest rates.

–Markel’s largest 20 stocks represents 80% of the value of its portfolio and are the stocks that Tom has the most confidence in.  The remaining 20% of Markel’s portfolio are relatively small positions that Mr. Gayner follows closely in order to learn more about them.

–He admires Bill Gates who once a year relocates to a remotely located cabin for a “think week”.   Gates is completely cutoff from all communication during this week.


 Posted by at 1:21 pm