The Oracle of Omaha Takes On The Creature from Jekyll Island

Warren Buffet, a.k.a the Oracle of Omaha, turned 90 on the 30th of August, 2020. He was born in 1930.

Even as he approaches the rare status of a centennial being, the Oracle of Omaha’s influence on the financial markets has not waned. During the height of the Covid-19 outbreak, the market waited with bated breath for any signals from the Oracle. He broke the suspense by dumping airline shares and leaving the market shell-shocked.

Truth is, at age 90, although he seems to be in great health (he gave a beastly 5+ hour presentation at the 2020 BH shareholders meeting) we don’t know how much longer Warren will be around. Although he sometimes gives us a peak into his thinking through his talks, his practical wisdom is best learned through observing his investment decisions. The decisions he makes as he navigates COVID-19 could very well be some of the last golden lessons we get from this great investment mind.

The markets hit by COVID-19 have been an unprecedented situation, even for the Oracle of Omaha. So far, his decisions and attitudes have been shrouded in enigma, with some analysts saying that he has had to reevaluate some of his long-standing principles. Could this be true?

Let’s take a look at some of them. 

Warren’s sudden change of heart(?) toward the shiny yellow metal

When the latest Berkshire Hathaway form 13F filing was released, the internet went crazy. It revealed that BH had purchased shares Barrick Gold, a gold mining company, and sold some of his bank shares. Headlines claiming that Buffet has “Dump[ed] Goldman Sachs for Gold” and “Warren Buffet undergoes conversion on gold” were published. 

As usual, if you skim the headlines and take them at face value, you’ll end up with a picture that could be quite removed from reality. We have to learn to read beyond the headlines, and seek information that doesn’t simply ride the hype for clicks and traffic. 

In my opinion, this article by Rob Berger on Forbes.com seems to strike a sensible balance. It points out: 

  • BH bought shares in Barrick Gold SHARES, not gold itself as a commodity. This subjects it to an entirely different set of decision criteria, i.e — gold itself does not produce any dividends of profits, and this is why Warren has spoken against it in the past. Barrick Gold as a company, does. 
  • It isn’t even confirmed that Warren himself was behind the decision, as he has delegated decisions to two investment managers, Ted Weschler and Todd Combs 
  • Although some of the positions in bank shares have been trimmed, BH still holds substantial shares in banks such as B of A 

Having just a couple of basic facts can lift much of the sensationalism and fog some headlines bring to the issue. 

Warren’s unexpected bet on major Japanese trading houses

Another issue that broke out was that BH had acquired shares in Japanese trading houses. The Guardian reports

“Buffett’s investment company, Berkshire Hathaway, has taken a 5% stake in each of the “sogo shosha”, or general trading companies, that play a vital role in the Japanese economy and are increasingly becoming global players.”

It’s not possible to determine the exact reasons for this without asking Buffett or the investment managers directly. But in my opinion, this is a clear defensive move by BH in anticipation of the impact of the massive inflationary rampage on the economy by the Creature from Jekyll Island (more on this in the next segment). 

Firstly, the “sogo shosha” are very diversified businesses. They deal in almost every aspect of the Japanese economy. Buffett is not a big fan of diversification as a primary investment strategy, saying that diversification evens out the upside as much as it does the downside. You are effectively settling for average, and as we know BH is anything but average. 

Secondly, in general these companies have been around for a very long time. Buffett understands that generally speaking, the longer a company lasts, the longer it lasts. This is the Lindy Effect. These companies have been through rough economic cycles before and survived them, so chances are that they will survive this one as well. 

The Oracle of Omaha Takes On The Creature from Jekyll Island

The Creature from Jekyll Island goes by many names. The Central Bank. The Federal Reserve. The moniker ‘Creature from Jekyll Island’ comes from the classic anti-fed literature from G. Edward Griffin that goes by the same name. According to the book, the Federal Reserve was born in 1910 during a clandestine meeting of politicians and financiers on the sandy beaches of Jekyll Island, Georgia. 

In short, the Federal Reserve is the entity behind the monetary policy of the US, which is a mechanism that controls the money supply, and indirectly —  the inflation rate. 

Buffett has actively spoken out in the past against inflationary practices and pumping the economy with the steroid of artificial fiat money. He has likened inflation to a “gigantic corporate tape worm”, turning bad businesses into fat beasts that constantly suck up investment and funds without paying out any dividends. 

For the real estate investor, inflation has two main implications. 

Firstly, it contributes to the asset price appearing higher and potentially untethers it from the intrinsic value of the asset. An extreme case of this would be a real estate ‘bubble’. 

Second, it reduces the real cost of the debt you hold against your assets. 

So some investors could argue that inflation is good for them. It raises the price of their assets while making their debt cheaper. What’s not to like? 

In truth, moderate levels of inflation is normal and expected in a healthy economy. But when the Creature from Jekyll Island gets a bit too enthusiastic (like it is now) and starts pumping trillions into the economy, it can have repercussions that worries even the Oracle of Omaha. 

Inflation is the common theme that runs behind two of BH’s latest, somewhat controversial investment decisions. Purchasing Barrick Gold and sogo shosha shares are consistent as a defensive strategy for an investor that could be expecting higher levels of inflation in the near future. 

But we should remember not to take anybody’s word as gospel, even Buffett’s. The Oracle of Omaha, after all, is also a simple 90 year-old man who loves drinking Cherry Coke at the end of the day. 

Happy birthday, Warren. 

Stay epic,

Sam Lee

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