Wait! Before you send that angry email, hear me out.
Sure, it’s my headline, but I can’t lay claim to the assertion.
If you’re a keen watcher of either gold or Berkshire Hathaway, you may have seen the storm of commentary that ensued when Berkshire’s Vice Chairman Charlie Munger uttered those words.
From the Wall Street Journal to what seemed to be almost every resources chat room and message board across the web, everyone was talking about it.
Charlie Munger Tees Off
For those who came in late, Munger gave a wide-ranging speech (available on YouTube here) at the University of Michigan in September 2010.
In that talk, he covered everything from his thoughts on accountants and politicians to his view on the Great Depression and, of course, gold. In the article, Munger is quoted as saying:
‘I don’t have the slightest interest in gold. I like understanding what works and what doesn’t in human systems. To me that’s not optional; that’s a moral obligation. If you’re capable of understanding the world, you have a moral obligation to become rational. And I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk.’
I’ll declare an interest up front – I’m a huge fan of Charlie Munger. I don’t always agree with him (and when I don’t, I’m usually wrong) but if there’s one thing he can’t be accused of, it’s being ambiguous.
‘I Have Nothing to Add’
If your only exposure to Charlie Munger is his role as Warren Buffett’s lieutenant at Berkshire Hathaway, you could be forgiven for thinking that he has little to say, other than the occasional acerbic one liner.
Munger remarking ‘I have nothing to add’ – usually after Buffett has waxed lyrical in response to a shareholder question – is one of the many in-jokes at the ‘Woodstock for Capitalists’ that is Berkshire’s AGM.
Even in that setting, however, he has a knack of getting to the point of a question or issue in a way that brings clarity to the topic at hand. He doesn’t mince his words. He says what he thinks, and spends little energy or time trying to sugar coat his message.
Charlie Munger is a very clever man – a polymath who has continued to place a big emphasis on interdisciplinary thinking. I highly recommend Janet Lowe’s excellent book Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger to learn more about Munger the man and Munger the investor.
‘When Charlie Speaks…’
Now back to the controversy at hand. Charlie Munger is a very rational man. It’s hard to overemphasise that point. He is rational to a fault. He deeply values mental models, and has thought long and hard about the valuation of financial assets. So when he speaks, it pays to listen.
Far from just being an ‘old-fashioned’ value investor, however, it is Munger who is credited with influencing his senior partner at Berkshire to pay attention to – and pay up for – business quality, rather than focusing only on the underlying asset value of the company.
The subtext of Charlie Munger’s comments about gold goes to the heart of his investing approach. He values a financial asset as a function of the future cash flows produced by that asset (for example, the profits of a business or the rent from a property).
The Greater fool Theory?
In the case of gold, however, there is no cash flow. After all, gold just sits there. It doesn’t sell anything, accommodate anyone or produce anything (not by itself, anyway).
An investor hoping to make money from buying gold is doing so on the assumption that another investor will pay more for that same quantity of gold at some point in the future – known disparagingly by some as the ‘greater fool theory’ (note the lower case ‘f’ – we’re Fools with a capital F!).
Some people hold gold as a hedge against losses in other asset classes – but the underlying assumption is still that someone else will pay up to buy it from them in the future.
In the meantime, there is no cash flow, no dividends and no rental return – simply the (hopefully) accruing capital gain.
There is no subtext in Munger’s judgement of investors engaging in this activity – he has no time for it. While he doesn’t say so, it’s fair to assume that he considers holding gold as little more than hopeful speculation.
The Other Side of the Argument
In the spirit of Foolish debate, our US site published an article a few days later, respectfully disagreeing with Charlie Munger’s categorisation of those who hold gold, and offering a thoughtful rationale for doing so.
Being able to clearly explain – if only to yourself – why you are buying, holding or selling any asset is an important part of successful investing. Try it for yourself – the process can be illuminating.
On the topic of gold, The Motley Fool Australia has produced a free report, Gold & Beyond: 3 Ways to Protect Yourself From Inflation. For your copy, click here.
Of the companies mentioned in this article, Scott Phillips owns shares in Berkshire Hathaway. The Motley Fool’s disclosure policy is golden.