Is Buffett buying gold?

Chas Craig, BridgeTower Media Newswires

There has been a lot of hand-wringing regarding news a few weeks ago that Warren Buffett, a longtime gold skeptic, bought shares in Barrick Gold Corp., a gold miner.

I doubt it was Buffett himself that bought Barrick. The financial media usually reports that “Buffett buys or sells ABC Co.,” but it often should be “Berkshire buys or sells ABC Co.” A few years back Buffett brought on two successors (Todd Combs and Ted Weschler) for him on the marketable securities side of the business, and they both have carte blanche with the pools of capital they are tasked with managing. Buffett says he finds out about their trades after they are made. You can usually tell if a decision to buy or sell was made by Buffett and Berkshire Vice Chairman Charlie Munger or one of the lieutenants by the size of the trade. As a rule of thumb, if it’s measured in the billions, it’s likely Buffett/Munger, and if it’s measured in the hundreds of millions, as the Barrick purchase was, it’s probably Ted or Todd. In another instance a year or so ago it was originally reported that Buffett bought Amazon, but it was later learned that it was Ted or Todd.

Buffett provided a full-throated version of his unfavorable view of gold in his 2011 letter. Along with Buffett’s annual shareholder letters dating back to 1977, the 2011 letter can be found on Berkshire’s website. The relevant excerpt begins midway through the 18th page. I doubt his position has changed materially on this subject.

It is strange though that an investment manager hand-picked by Buffett would buy Barrick, or Amazon for that matter. However, as Buffett wrote in his 1996 letter, “You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” So, Ted and/or Todd deem their circles to encapsulate gold miners and certain high-multiple growth stocks.

It should be noted that the arrangement with Ted and Todd is not new to Berkshire. In the early days of Berkshire (call it mid-1960s to mid-1980s), Charlie Munger would have succeeded Buffett if he had been hit by a truck. Later, the chief investment officer of Geico, Lou Simpson, would have been his successor. Like Ted and Todd now, Lou, who retired in 2009, managed Geico’s securities portfolio independently. Below is an excerpt from Buffett’s 2004 letter on the subject:

“You may be surprised to learn that Lou does not necessarily inform me about what he is doing. When Charlie and I assign responsibility, we truly hand over the baton – and we give it to Lou just as we do our operating managers. Therefore, I typically learn of Lou’s transactions about ten days after the end of each month. Sometimes, it should be added, I silently disagree with his decisions. But he’s usually right.”

It is interesting and revealing how investors that start from the same first principles can arrive at portfolio compositions so different from one another. This was a key part of the 1984 “Super Investors of Graham-and-Doddsville” speech given by Buffett at Columbia Business School to commemorate the 50th anniversary of Security Analysis, the seminal work of his professor/employer/mentor, Benjamin Graham, along with David Dodd. A transcript of the speech is available on Columbia’s website.

Bottom line, the Barrick purchase probably tells you less about what The Oracle of Omaha currently thinks than it does about the types of companies that will be in the fairway for Berkshire after Buffett is gone.

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Chas Craig is president of Meliora Capital in Tulsa (www.melcapital.com).