Berkshire Hathaway bear turns bullish on gold - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Berkshire Hathaway bear turns bullish on gold 

A  A  A
In this issue:
» Why are emerging market currencies falling?
» Mr Murthy comes back as Chairman for Re 1 salary
» RBI tightens regulations for new bank licenses
» Emerging markets vulnerable to foreign capital flows
» ...and more!

A very famous quote by value investing genius Warren Buffett goes thus: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

This may appear simple in theory. But when it comes to application, not many would be able to stand the test. To be a contrarian, to stand apart from the crowd requires great conviction and discipline.

A gentleman who answers to the name of Doug Kass has done exactly this. You will recall that last month Mr Kass had participated in Berkshire Hathaway's annual general meeting as the official Berkshire 'bear'. Now, Mr Kass has taken a contrarian call on gold.

While investors and speculators across the globe are dumping the yellow metal, Mr Kass has turned extremely bullish on gold. Here is what he has to say: "There is probably no better time to consider diversifying one's portfolio into a depressed asset class (e.g., gold) than when the crowd is optimistic about a vigorous and self-sustaining global economic recovery and when the world's stock markets are at record high prices."

Let us explain his rationale. The overall sentiment has turned against the precious metal. Many have called it the end of the gold bubble. As a result, the number of gold bears has gone up dramatically. Too many short sellers crowding in may create a short squeeze and result in demand for gold.

Moreover, all hopes are now pinned on a sustained global economic recovery. In fact, the US dollar has strengthened in recent times backed by hopes that the economy is set to recover and the US Fed would gradually wind up its QE program.

Mr Kass believes these expectations are too optimistic. On the contrary, he expects all major currencies including the US dollar to weaken over time. The stimulus program may go on much longer than what people think. At the same time, he is of the view that inflation would eventually show its ugly head. And this would push gold prices higher.

We very much agree with the views of Mr Kass. The only point where we differ is how we look at gold as an asset. It is worth noting that Mr Kass has been bearish on gold earlier. He has now turned bullish purely because of the contrarian appeal and his overall bearish view on stocks. We, on the other hand, look at gold an as insurance, as a keeper of value. We believe that a small percentage of your investment portfolio, say at least 5%, should be parked in the yellow metal. This, in our view, will help you guard against destruction of purchasing power caused by unforeseeable crisis or reckless government policies.

Do you think this is a good time to buy gold? Please share your comments or post them on our Facebook page / Google+ page

How we delivered double, triple and even quadruple digit returns...

For years, many amongst you have asked us how we pick our stock recommendations...

Recommendations that have delivered double, triple and at times even quadruple digit returns!

However, our stock-picking process has been our secret and no one outside our research team had access to it... Till Now!

Yes, this is a rare opportunity to learn how we pick our stock recommendations, straight from our own research team.

There are thousands who would want to learn this... But there are Limited Seats Only!

So, click here for full details... and act now...

01:30  Chart of the day
The Indian rupee has been sliding against the US dollar again in recent times. With the rupee heading close to its all-time low, Indian policymakers are again worried. But is the rupee the only currency that has been tumbling? The answer is no. In fact, several emerging market currencies have been falling. The chart of the day shows the returns that worst performing emerging market currencies have delivered in the last one month.

Many have already started calling an end to the bull rally in emerging market currencies. The decline in emerging market currencies is largely attributable to the expected economic recovery in the US and the chance of a consequent pull back of the QE program.

Data source: DNA Money

Infosys Ltd recently announced a comeback of its founder Mr Narayana Murthy. In a letter to the people of his company, Mr Murthy has stated that he would be working for a token salary of Re 1. The practice of working for a token salary is not really new. At times of crises, company CEOs have opted to work for token salaries. But let's not mistake this as working for free. The CEOs do get compensated in the form of stock price appreciation and dividends on their personal holdings in the company. Nevertheless, the impact of such a practice is that it does not add additional stress on the company's financials. This is a boon especially when times are tough. This makes one wonder if other companies in India would follow Mr Murthy's example. As per an article in the Times of India, this is highly likely.

Most companies in India have seen their earnings come under pressure in recent times. This is largely due to the depressive macroeconomic situation. As a result, the CEOs may opt to work for a token salary. This would work well for companies especially for those where the compensation to the top brass is a significant portion of the profits. It also helps that the returns for such CEOs are tied to their stock holdings. As a result, they are more motivated to ensure that the company delivers better performance. However, history tells us that CEOs opting for such pay structures is usually a temporary thing. It is a short term approach adopted during a crisis situation. Therefore the question we must be asking ourselves is there a crisis situation out there? If this is true then investors would do well if they adopt a cautious approach when it comes to their stock investments. The importance of doing your own homework becomes even more pronounced during such times.

When RBI announced granting new banking licenses, there was considerable interest shown by big corporate houses. Many of them already had non-banking finance arms. Thus, they wanted to expand operations by foraying into banking. But it was not always going to be easy.

The banking and the financial industry worldwide has received considerable backlash and criticism. This is for the role it played in manifesting the global financial crisis. One of the reasons why the Indian banking industry was relatively unscathed was because of the strong regulations imposed by the RBI.

Hence, there have been concerns whether awarding banking licenses to corporations was a good idea. One take on this was that the RBI will have to tighten its regulatory requirements while doling out new licenses. And it seems to have done just that. The central bank has introduced a provision that the promoting company aspiring for one must have at least 51% public shareholding. This is over and above its guideline that the non-operative financial holding company (NOFHC) floated for the purpose should itself have 51% of its voting equity shares held by companies in the promoter group. The idea is to make sure that licenses are not awarded to all and sundry. But only to those who are very serious in carrying out banking operations. We believe this to be a step in the right direction. And will not deter those corporations which really want to establish a strong presence in the banking arena.

There are two things that drive equity markets. One is earnings and the second is liquidity. We know that during recession earnings fall. At this point it is liquidity created from money printing that drives the markets. But once that liquidity dries up, prices revert to their fundamental value supported by earnings. Something similar has been happening in the emerging market countries like Indonesia, Thailand and Philippines. Until recently, these markets were soaring. This was due to the liquidity injection exercise undertaken by US Federal Reserve. However, Ben Bernanke has now given indications that this stimulation exercise may come to an end soon. As such, these emerging market stocks have taken a beating.

It is not that these markets were supported just by the external liquidity. The fundamentals of these markets were strong enough to attract foreign capital. But in emerging markets, not enough savings are channelized into equities. Thus, they are more dependent upon external cash flows. And this external cash flow depends upon the monetary policy exercise of ECB or Federal Reserve. Unless enough domestic savings are channelized into markets, emerging equities will continue to remain dependent upon foreign capital. And thus remain volatile to that extent.

In the meanwhile, the Indian share markets were trading flat. At the time of writing, the BSE Sensex was marginally up by 9 points (0.04%). The sectoral indices were trading mixed with stocks in the oil and gas and realty space leading the gains. However, stocks in the software and FMCG space were witnessing maximum selling pressure. Asian stock markets and European markets were trading in the red.

04:35  Today's investing mantra
"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."- Warren Buffett

  • Warren Buffett - The Value Investor
  • The 5 Minute WrapUp Premium is now Live!
    A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

    Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

    Latest EditionGet Access
    Recent Articles:
    How Unique Are the Companies You Invest In?
    August 21, 2017
    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
    You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
    August 19, 2017
    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
    Why NOW Is the WORST Time for Index Investing
    August 18, 2017
    Buying the index now will hardly help make money in stocks even in ten years.
    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
    August 17, 2017
    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Equitymaster requests your view! Post a comment on "Berkshire Hathaway bear turns bullish on gold". Click here!

    3 Responses to "Berkshire Hathaway bear turns bullish on gold"


    Jun 6, 2013

    The emergency market failed because of tv gold hike unnoticed .


    Jun 6, 2013

    Because of gold prose hike.



    Jun 5, 2013

    I agree with your point about treating GOLD as an insurance. However a lot of people treat that as an investment rather than insurance. Nothing wrong in that. The difference is that when you buy insurance you ideally do not want the returns, its a hedge... should things go wrong. With the recent fall in GOLD prices a few people [I know] have become scared saying that if GOLD has to go down, why buy that. Which basically brings us to the point... do you treat GOLD as insurance on investment.

    Equitymaster requests your view! Post a comment on "Berkshire Hathaway bear turns bullish on gold". Click here!


    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

    Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

    This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

    This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

    This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

    As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407