“I am an old man and have known a great many troubles, but most of them have never happened.” -Mark Twain
After two years of strong stock market rebounds, equity values around the world weakened considerably in 2011. The one notable exception was the US market which, on average, remained flat for the year. Canadian stocks in contrast were down by 11% as oil and other commodities dropped in value amid fears of a faltering economic recovery. (1)
What did not happen
It was a year of extreme market volatility driven by fear and uncertainty. From the outset, the global village seemed to lurch from one crisis to another. Starting with the Arab Spring and the triple disaster in Japan in the first quarter, the focus quickly turned to political gridlock in the US and the shocking downgrade in America’s debt rating. By the end of the year, we had become obsessed by the deepening debt crisis in the Eurozone. Yet, despite all that went on, 2011 might best be remembered for what did not take place. Or, as Mark Twain might have said, the world knew a great many troubles, but most of them never happened. (2) The ultimate crisis in 2011 was a crisis of investor confidence.
So what didn’t happen in 2011? For starters, the price of oil did not go through the roof as many had speculated. The US dollar never imploded. The greenback actually strengthened in value despite the debt rating downgrade. No real solution was found to the political impasse in the US. At the eleventh hour, a compromise was reached to raise the debt ceiling so the US government did not default on its obligations. But, there is still no consensus on the deficit and debt reduction strategy.
Political leadership was also lacking in the Eurozone. And not so surprisingly, no definitive solution to the European debt crisis was found – another source of ongoing concern. Thanks to a series of emergency measures, and endless summits, we managed to skirt the worst. The European union did not fall apart, countries did not go bankrupt and European banks are still open for business.
Perhaps most telling of all, despite all, the world economy kept on trucking in 2011, growing albeit at a slower pace, but growing nonetheless. The dreaded double dip recession never came to pass.
What the oracle said
As many of you will recall, I made the trip to Omaha Nebraska in April to participate in the annual shareholder’s meeting of Berkshire Hathaway, the holding company run by Warren Buffet and his partner, vice-chairman Charlie Munger. I promised back then to share with you some of the nuggets of wisdom I came away with. I figure there is no better time than the present to make good on that promise. After a year fraught with fear and uncertainty, we could all use a good dose of the famous Buffet insight to put things into perspective.
First, to set the background for you, I should explain that as many as 30,000 or more gather in Omaha each year to hear the “Oracle” speak. In April 2011, Buffet was 81 years old and Munger 87, both arguably long past retirement age, but no less on the ball. For the better part of the day these two elderly gents fielded questions from the audience with humility and grace, wisdom and wit. It was quite inspiring.
In response to a query on the current economic woes of the US, Buffet chose to express his optimism for the future by drawing on his 81 years of life experience:
“I was born in 1930 and if I had been told in the womb what would happen during the Great Depression, that unemployment would increase to 25%, the Dow would go to 42, the Dust Bowl would devastate the Midwest, and 4000 banks would close, it would have been like a Woody Allen movie where you hear : ‘Go back! Go Back!’ But since my birth, the Dow jones has increased to 12,000 points and the standard of living in the US has increased sixfold!”
Then Buffet added this other personal anecdote. It was 1952, just prior to his marriage to Susan Thompson, when his future father-in-law took him aside to share some fatherly advice: “Warren, I want to tell you, don’t worry about it, but you are going to fail. You will be poor and so will my daughter. But I don’t want you to feel responsible. It’s not going to be your fault. This country is going to hell…” Needless to say the irony of this statement was not lost on anyone, as the crowd laughed up-roarously.
Buffet continued, “There have been negatives and problems all my life. But that has not stopped me and it should not stop you today. Then he added, ” There is no other place or time I would rather be born than in the US today.”
Interestingly, one of the headlines I saw in the business pages on the last day of 2011 read: “US consumers getting perky!”, a testimony to the relative strength of the US at a time when doubt abounds. (3)
Now here’s one for all the gold bugs out there. A question regarding what assets to hold in the event of inflation spawned a fascinating and delightful reflection from Buffet on the subject of gold. The yellow metal has long been recognized as a hedge against inflation, but in troubled times, it is also seen as a safe haven. This is largely why the price of gold has risen threefold since 2007. (4)
Buffet explains: “There are some assets that don’t produce anything, but you buy them hoping someone will pay you more for them later. The classic case is gold. If you take all of the gold in the world and put it into a cube, it would weigh 165K tons and would be about 67 feet long on each side. If you had a ladder big enough, you could put it up, climb on top, and think you are king of the world. You could fondle it and polish it, but it would never do anything.”
When you buy gold, you are not only betting on how scared people are now, but also on how scared people will be years from now….Rising prices create their own excitement, especially when it comes to gold. If your neighbor owns gold and he is making money and you are not, it can affect your behavior. People like to get in on things that are rising in price. But, over time, that is not a good way to get rich.”
Ultimately Buffet would rather bet on good, productive businesses to outperform other assets that don’t do anything. Then to bring his point home, Buffet added: “…all the gold in the world is worth $8 trillion (T). There are roughly 1B acres of farmland in the US and all the farmland is worth a little over $2T. And if you take 10 ExxonMobiles, they would be worth around $4T. So you could have all the gold in the world or you could buy all the farmland in the US, 10ExxonMobiles and still have more than $1T to walk around with.
As Buffet’s associate Charlie Munger often gets the last word, he chose to add this wistful comment: “It is peculiar that people buy assets that work only if the world really goes to hell. That is not really a rational thing to do.” (5)
What is to come
In 2011, we saw a definite change in market sentiment as significant issues came to a head for which there was no quick fix. It is as if we are finally coming to terms with the full extent of the fall-out from the financial crisis of 2008.
No doubt there are big challenges ahead. That is a given, as is the heightened market volatility which such uncertain times inevitably generate. But to worry over possible outcomes that are neither probable nor desirable, is ultimately self-defeating. Or, as Charlie Munger would say: “It is not a rational thing to do.”
We have only to focus our energy on the timeless wisdom that is the foundation of financial success and true prosperity. And whenever we forget, fortunately, there are still a few around like Buffet and Munger to remind us.
Sara Gooderham January 2012
Disclaimer from PEAK Securities Inc.: The information contained herein was prepared by Sara Gooderham, an Investment Advisor with PEAK Securities. This information has been obtained from sources we believe are reliable but is not guaranteed and may be incomplete. The opinions expressed herein do not necessarily reflect those of PEAK Securities. PEAK Securities is a member of the Canadian Investment Protection Fund (CIPF).
Notes:
1 – http://www.brainyquote.com/quotes/quotes/m/marktwain108600.html 2 – Year in review (2011), www.fidelity.ca
3 – http://goldprice.org/gold-price-history.html
4 – Financial Post, December 30, 2011
5 – For more notes on the BRK 2011 annual meeting, see – http://www.scribd.com/doc/54483729/2011-Berkshire- Annual-Meeting-Notes
