Ageing stockbrokers have regular meetings that they wait for nervously or with delight: the annual letter sent by Warren Buffett to his shareholders clearly belongs to the second category. The 2012 letter lived up to promises and starts with some skilful teasing: Warren Buffet has found his successor… But no need to jump on the letter since he provides no names! While, the headline was widely commented on in the financial press (could the talented Ajit Jain be the winner?), our attention was more drawn to the end of the letter given that it concerns asset allocation.
Just one page to talk about bonds, gold, farmland and equities and yet the essential is in there. We have little to say about state bonds, since we have often pointed out that in the US, Germany and France, their anaemic yields can in no way be attractive, even in the event of low inflation. (“A yield of 0.8% for five-year government bonds, whether German or US, is no longer a risk-free return, but a return-free risk as a columnist in the Wall Street Journal summed up so well).
So let’s move on to the two other asset categories, gold and equities. The first has been shining brightly for the past five years and can be summed up in three points: it is yellow, it pays no dividend and is expressed in the very cryptic unit of troy ounces (although the price of $1,750 is well known, it is still difficult to imagine what this all corresponds to). Meanwhile, equities have restored some sparkle since the beginning of the year, but are suffering from their erratic past.
This is where Warren Buffett brings in two cubes: the first, pile A, is made up of all of the world’s gold stocks, 170,000 tonnes, forming a cube of 68 feet per side (20 meters). This cube “weighs in” at around $9.6 trillion (suspicious readers should note that there are 32,000 ounces in a tonne…).
Slightly less than 10 trillion dollars in a compact volume makes for a significant amount of value in the same place… Warren Buffett’s eighty-year old wisdom gets the better of us when he presents pile B, with an identical value. Pile B is made up of all of the land in the US that could be cultivated (400m acres), 16 EXXON MOBIL companies (the most profitable company in the world with $40m in annual net profit) and 1000 billion dollars…
So the time has come to choose: pile A, 20 cubic metres of yellow metal, or pile B, which is bigger in volume terms and above all, more profitable, since pile B is made up of real assets, which in Buffet language is synonymous with assets generating yield. This yield represents staggering amounts of corn, wheat and milk for farmland assets and 144 billion dollars in annual dividends for the 16 EXXON MOBIL companies. The question of “when?” is open, but there is no doubt of the outcome: sooner or later, simply by the make-up of the yield, pile A will inevitably be exceeded by pile B.
As well as being an excellent investor, Warren Buffett also provides simple answers to complicated questions and at the start of this year, when the never-ending question of asset allocation is being asked, the two piles provide precious guidance. They remind us that over time, yield generates performance. Gold was an instinctive and profitable safe-haven in a period of market standstill and doubts on the world’s second currency. But if we believe in a simple return to normal on the markets, the time has come to return to real assets. If gold still fascinates you, remember the old saying: what the wise man does in the beginning, the fool does in the end….
Didier LE MENESTREL
With Marc CRAQUELIN