Warren Buffett vs. Goldcorp
One of my subscribers and friend,
Charles Cohen, wrote this article which I find very interesting,
comparing the performance of Warren Buffett and his entity,
Berkshire Hathaway vs. Goldcorp. With all of the media hype
Mr. Buffett receives one would believe his returns are staggering.
Think again! Let's begin with some charts and then the article.
BERKSHIRE HATHAWAY 10 YEAR CHART
GOLDCORP 10 YEAR CHART
BERKSHIRE
HATHAWAY 5 YEAR CHART
GOLDCORP 5
YEAR CHART
THE BERKSHIRE HATHAWAY
ANNUAL RELIGIOUS PILGRIMAGE
A DISCLAIMER.
This article is not intended to denigrate the
legendary investor Warren Buffett personally. It was prompted
instead by the near idolatrous atmosphere that has arisen recently
of not just Mr. Buffett, but his personal vehicle, Berkshire
Hathaway. By now almost any investor who is still breathing is aware
of the extraordinary record of this company and Mr. Buffett over the
past 30 years or so. But what has not been ever really made certain
is if, in recent years, this adulation is any longer justified. So I
decided to check this out.
This week marked the most recent annual
Berkshire meeting, one I refer to as the annual religious pilgrimage
to Omaha, Nebraska, the home of the venerated Mr. Buffett. Such a
visit has its roots deeply in other great faiths of the world. Under
the Torah, all Jews were required to make a pilgrimage to Jerusalem,
the city of the Great King, the city where the God of Israel
dwelled. Islam believers that all Muslims, if they can afford to,
are expected to make a pilgrimage to Mecca at least once in their
lifetime.
But even I was stunned to read that a throng of
over 30,000 congregants were flying, driving, walking or crawling,
as they might do in Mexico, to the great ingathering in Omaha. I was
certain that the article was mistaken, and meant they were heading
to a Jimmy Buffett concert, instead. But it was Warren, not
Jimmy.
However, what really made me decide to
investigate Berkshire’s record was the Jim Sinclair article on the
recent large derivative loss revealed by the company. This was a
strangely unexpected jolt since the Omaha Apostle had prophetically,
not profitably, warned the world several years ago in his strongest
language, of the potential effects of these instruments. Remember,
it was the WMDs that got us into Iraq in the first place, so
obviously the financial WMDs were to be shunned at all costs. Who
would have guessed that the sagacious Mr.Buffett would have ignored
his very own admonition?
This derivative loss was part of last week’s
shocking revelation that Berkshire’s earnings had actually
fallen 65%. Yes,
Berkshire Hathaway’s earnings were actually down. Like the fallen
angels Berkshire had now assumed the character of mortal companies
such as Bear Stearns and Countrywide. More interestingly, as you
shall see, it puts a different hue on the performance of our
beleaguered gold shares.
I believe that the best way to check if
something about a stock is really true or just mindlessly accepted
is to view its chart over a period of time and then compare it to
another company or other benchmark. So for our purposes I chose to
put Berkshire (BRKA) along side of Goldcorp (GG,) the most
representative and purest gold company. On the surface of things
this appeared to be a ridiculous comparison. The universally
hallowed Berkshire is selling at an unfathomable $133,600, a price
fitting for wealthy sheiks or fired CEOs, but worthy of Berkshire’s
heavenly aura. Lowly and unappreciated Goldcorp (GG) sells at a very
earthly $36.00 with few public advocates, and rarely mentioned in
the savvy financial media. You would have to sell almost 4000 shares
of Goldcorp just to buy 100 of Berkshire. But in markets a lot of
things are relative especially when you are dealing with
performance. And what I discovered was quite shocking. Below are
these results, along with some comments.
BERKSHIRE AND GOLDCORP RETURNS OVER
THE PAST 5 AND 10 YEARS—SOME UNEXPECTED RESULTS
1) I had expected to find Berkshire Hathaway
had shown some extraordinary returns that would justify the
exaltation of its worshippers. But that is not the case. Very
curiously, since 1998, and at almost every time period since then,
Berkshire has not just done that well, and more interestingly, it
has paled compared to Goldcorp. Now to the reverential, believing
media, this statement might seem heretical, for witches were burned
at the stake for less.
In case you think I have been fibbing, here are
the comparisons of Berkshire and Goldcorp during the past five and
ten year period. You can check this in the above 5 and 10 year
charts of each company.
Berkshire
Goldcorp
1) 5 years since March 2003
90% 360%
2) 10 years since early 1998
65-75% 1500%
If you had been holding on to Berkshire
Hathaway for the past 5 years, you have been rewarded with about a
12% yearly return. Not great, but not bad! But Goldcorp rose 360% or
4 times as much. That is pretty impressive.
But the 10 year results were stunning. BRKA,
from 1998 until now, has risen less than 75% or about 5% yearly, not
exactly what I had expected nor something worthy of such adoration
and worship. Goldcorp, held by few institutions, has gone up 1500%
or 20 times as much. Now that is a move worthy of media mention and
admiration but where have we seen this ever mentioned? Even the
adoring Berkshire Hathaway holders might wonder why Mr. Buffett who
is known for his uncanny foresight chose the WMD world of
derivatives rather than gold. Only the Sage of Omaha knows.
CLIMBING A WALL OF
WORRY--CORRECTIONS
2) Since BRKA cannot be considered an
extraordinary investment vehicle over the past decade, as we might
be led to believe from the media attention, it would be reasonable
to expect some wall of worry as expressed in periodic large sell
offs. But this also has not been the case.
Now this is a rough eye inspection of the
charts, but during this period it appears that Berkshire has sold
off or corrected over 20% just 3 times and NOT EVEN ONCE in the past
5 years. Now never to get worried or shaken is faith almost of a
religious nature, even when you consider that Berkshire has
obviously made some serious strategic errors in the past year or so.
But as I have pointed it out, owning Berkshire is a religious
experience and not one to be doubted.
And Goldcorp which only the perverse world of
gold bugs would own has sold off at least 20% from 10-12 times since
1998 even as it rose 1500%. And since March 2003, as GG sold off
over 8 times, it still managed to rise 360%. This type of contrary
behavior has to puzzle most investing pundits who have steadfastedly
warned of the gold “bubble” that would one day snare the unprepared
and ignorant. Most advisors to this day advise the public to be
careful and go with the proven quality such as Berkshire Hathaway.
Given the comparative results wouldn’t you think that Berkshire has
had to endure the sharp falls, not Goldcorp? Markets are amazing,
and very often totally contrary to our expectations.
A CONCLUSION
What I wanted to show is that perception is not
always reality. In great bull markets, stocks always seem to be
swooning, flushing out the confidence of those who had seemed to be
the most faithful holders while causing nearly everyone to wonder if
the move is over. Few ever reap the entire benefit of a great move.
Over any long period of time, it does not belong to the constant
callers of near-term tops, but to the patient. Goldcorp is a
legitimate example of this as it has moved up fitfully over the past
10 years with frightening sudden declines.
On the flip side, venerated companies which
over the years have become universally accepted and mainstream such
as Berkshire Hathaway with its mythological leader always appear to
be the best place to safely invest. We can also include Microsoft
with trillionaire Bill Gates, and GE with the legend Jack Welch at
its helm. And yet, over the past decade you could have done nearly
as well in short-term money market funds as in BRKA. And you would
have done worse with Microsoft and GE. Since 2000 you would have
been scalped almost 50% in these two stocks. Yet, if you took some
kind of main street or even Wall Street pulse which stock among the
four (BRKS, MSFT, GE, GG) they would favor, guess which one would
come in last?
The purpose of this piece is to put things into
a grounded factual perspective, not based upon a feeling but upon
the historical results. Here is my conclusion. The mainstream
approved companies such as Berkshire, Microsoft, GE, Citigroup, the
housing sector have proven to be poor choices in spite of nearly
universal acceptance. Yet, gold, silver and the mining companies
have risen sharply these past 5 or ten years in spite of all of the
public pessimism and ignorance towards gold. Now that our
assumptions towards the untenable condition of the world currency
system along with an ongoing sharp deterioration of the financial
landscape are coming to pass, isn’t it logical to believe that the
future will yield at least similar results, and even more likely,
better ones?
Please stop worrying and be patient. Isn’t
logical that we are looking at a future world of great uncertainties
and turmoil? I firmly believe that the next 5 or 10 years will dwarf
anything that we have witnessed so far, but it might not be very
pleasant or satisfying.
Chuck Cohen -- ikiecohen@msn.com
Thanks Chuck for allowing me to reprint your
article for my readers at
www.preciousmetalswarrants.com
