Saturday, October 6, 2012
"I think [Buffett] is making a big mistake..."
In a recent CNBC interview, hedge-fund billionaire Ray Dalio explained how he has a different view on gold than legendary investor Warren Buffett.
Regular readers know Buffett is one of the most vocal detractors of gold ownership. Buffett dislikes the precious metal because it produces nothing and provides no income. He says the only thing you can do with gold is "fondle it... but it will not respond."
Regular readers also know we disagree with Buffett on a few ideas... This is one of them.
Dalio is the founder of Bridgewater Associates. In 2011, Bridgewater was ranked as the largest and best-performing hedge fund in the world. It has about $130 billion under management. Over the last 20 years, it has returned 14.7% on average. Dalio is rightly one of the most respected investors in the world. And when talking about gold, Dalio says Buffett is dead-wrong...
Keep in mind... Dalio is not a "gold bug." He's an investor who will trade any asset class, including stocks, currencies, bonds, commodities, and gold. And Dalio believes it is too risky not to have gold in one's portfolio.
In the interview, Dalio said, "Gold should be a part of everybody's portfolio." His reason is simple: It's sound diversification. Gold is real money. Its value cannot be debased like paper currencies can. The words had barely left Dalio's mouth before the interviewer interjected, "Warren Buffett won't touch gold!" Dalio responded by saying he thinks Buffett is making a big mistake.
As we've written many times, most of the large, developed economies of the world (like the U.S. and Europe) are in a "no way out" situation. They have taken on incredible debts and massive, unfunded liabilities. The only way to pay for it all is to print more money. Dalio noted the same by saying, "We have a situation now where you have too much debt. Too much debt leads to printing of money to make it easier to service."
Supporting Dalio's thesis, gold recently hit a new high in euros and Swiss francs.
Just in case you're feeling too optimistic, Sam Zell and Bill Gross are here to help change your mind...
We have a lot of respect for the investment abilities of both Zell and Gross...
Zell is a legendary investor who has made billions of dollars in real estate. His contrarian investment approach of buying troubled assets during depressed times earned him the nickname "Grave Dancer."
The approach helped one of his companies, Equity Office Properties, to become the largest office owner in the U.S. In 2007, near the height of the real estate bubble, Zell sold Equity Office Properties (which was also owned by shareholders) for around $39 billion. In other words, Zell knows how numbers work. And he knows value.
In an interview with CNBC, Zell told viewers he sees trouble ahead for the U.S. economy. Zell says he believes the Fed's latest round of monetary stimulus (QE3) has done nothing but make everything "massively too expensive." He also says government intervention in the market has prevented a natural, healthy clearing process. Zell believes the underlying fundamentals of the economy are so weak, they support a Dow closer to 9,000 than 14,000.
Bill Gross' latest letter to investors shares Zell's gloomy outlook... and then some.
Gross is the co-founder of Pacific Investment Management Company (PIMCO). The firm has more than $1.7 trillion under management. Of this amount, Gross manages $270 billion in PIMCO's Total Return Fund. It's the largest bond fund in the world. Gross has an incredible track record running it.
Gross is now so rich and powerful, he's free to say whatever he pleases. And right now, Gross says the U.S. fiscal policy will lead to damage that will "likely be beyond repair."
In PIMCO's "Investment Outlook," Gross says the U.S. is like a drug addict hooked on "budgetary crystal meth." Federal expenses overrun revenue to the tune of $1.5 trillion each year. The only way the U.S. sustains itself is through a massive infusion of "debt meth." Gross cites International Monetary Fund estimates that the U.S. will need to cut its debt-to-GDP ratio by 11% over the next five to 10 years. This amounts to $1.6 trillion in spending cuts and/or tax increases each year.
Gross recognizes an accommodating Fed is always ready to give the government its "fix" of freshly printed money to make ends meet. The result will be a massive inflationary "ring of fire" that he says will singe stocks and burn bonds to a crisp. He concludes only gold and real assets will thrive within the "ring of fire."
Finally, well-known hedge-fund manager David Einhorn noted that his name has become a verb. To be "Einhorned" is to see your stock's price get hammered if he reveals a new short and soar if it's revealed he's long.
He spent the first several minutes of his presentation at the Value Investing Congress telling the audience to do their own homework and warning them against following anyone blindly into any investment.
(That goes for the investment advisory business, too... You should always use our research as a starting point for your own due diligence. We're not doing our job if we don't tell you the same thing.)
Einhorn reiterated his short thesis of coffee-machine maker Green Mountain Coffee Roasters (GMCR). Einhorn noted the September 16 expiration of its patents on the K-cup coffee packs that fit their single-serving coffee makers.
"I think Green Mountain has succeeded in making their financials indecipherable," he added. "And they don't generate any cash... " We haven't researched Green Mountain like Einhorn has... but that sure doesn't sound good.
He also made cases for going long General Motors (GM) and health-insurance company Cigna (CI). He finished by presenting his case for shorting Chipotle Mexican Grill (CMG)...
Chipotle is one of the great business success stories of the past two decades. Its approach of offering high-quality fast food at reasonable prices has made it one of America's most popular restaurant chains. It has also made it one of the world's most popular growth stocks. Shares are up nearly 500% over the past six years.
Einhorn believes rising food costs and increased health care costs for workers will weigh on the company. At the same time, the restaurant has limited ability to raise prices because of increased competition from businesses like Taco Bell. With an extremely rich price-to-earnings multiple of 36, any misstep by Chipotle could make for a huge fall in the share price.
Chipotle fell 4.2% after Einhorn's comments. It was "Einhorned."
Date Range:9/27/2012 to 10/4/2012
Date Range:9/27/2012 to 10/4/2012