Gold vs Berkshire Hathaway

But much of Berkshire's outperformance came in its earlier decades. Returns lately have been rather more subdued – which is why it's odd that Mr Munger in particular has been so dismissive of investment in other asset classes, specifically gold.

I beg to differ. I've been a gold enthusiast for years, and I and many others have done very well out of it. As I began to assemble my arguments, I became increasingly interested in the recent relative investment performance of Berkshire Hathaway's shares.

During the past five years, they have appreciated by 36 per cent compared with 11 per cent for the S&P 500 with after-tax dividends reinvested. This is a very good performance bearing in mind that many US investment managers lost money during this turbulent period. However, to some degree you'd expect that, since Mr Buffett is not just another investment manager. His reputation gives him an edge. When he invests in a company, such as BYD in China, his involvement encourages many other investors to follow suit, providing him with a strong tailwind. His status also enables him to negotiate very advantageous deals, which other investors would find impossible to emulate. Look at his investment in Goldman Sachs; at the height of the credit crunch, $5bn secured him preferred shares with a 10 per cent guaranteed dividend together with $5bn of warrants. The very next day, other investors bought common stock at the same price in a fund-raising – without the 10 per cent guaranteed dividend, and without the free warrants.

Jim Slater

And even with those advantages, a 36 per cent gain doesn't compare well with the 166 per cent appreciation enjoyed by the "jerks" who bought gold five years ago. That's 4.6 times what Berkshire Hathaway's shares have returned. It must have escaped Mr Munger's attention that gold cannot be judged today in the same way as five years ago. There have been a number of developments of great importance:

■ Exchange-traded funds have made it possible for the man in the street to buy physical gold easily without being regarded as a crank hoarding coins buried in a tin box in the garden.

■ With interest rates now ultra-low thanks to global central bank largesse, the opportunity cost of holding gold is negligible.

■ The Chinese government in recent years has been encouraging its population to buy gold bars and gold coins as part of their personal savings programmes. During the first 10 months of 2010, China imported 209.7 metric tons of gold – a fivefold increase over 2009.

■ Central banks, alarmed by the weakness of the dollar and deteriorating US public finances, are beginning to see gold as an alternative currency with several of them now buying instead of selling.

■ US national debt has risen to $14 trillion, and Dallas Federal Reserve president Richard Fisher calculates that the "unfunded debt of Social Security and Medicare combined has now reached $104 trillion". How else can this be paid back without dollar devaluation?

■ Other major currencies have problems of their own. Indeed, there has rarely been such a time when almost all paper currencies look so doubtful.

In short, the world has changed radically, and I would put it to Mr Munger that, given the developments above, holding gold is actually very rational.

Gold is not alone in massively outperforming Berkshire Hathaway's shares. The entire commodity complex has done so (see chart below). Base metals have gained an average 131 per cent; even lowly tin, used for food tins and solder, has almost quadrupled. In precious metals, silver was up a stellar 244 per cent and platinum 83 per cent while oil lagged behind up only 46 per cent.

Berkshire vs durable commodities ($)

You might think it unfair of me to compare the performance of Berkshire Hathaway's shares with commodities – after all, they are very different propositions. So look at equities. The second chart below shows what happened in US dollar terms in world stock markets. Berkshire may have beaten the US market, but Brazil was the leader with a gain of 171 per cent followed closely by China, Malaysia and India. Japan and the UK were the most disappointing with losses of 12 per cent and 3 per cent, respectively but even the average was 71 per cent – almost double 36 per cent for Berkshire Hathaway shares.

Berkshire vs representative world markets

Note: All returns are in US$ with after-tax dividends reinvested

Messrs Buffett and Munger are long-term investors, famously remarking that they buy shares on the basis that the market might close the following day and not reopen for five years. But the comparative performances over 10 years are even more compelling. The price of Berkshire Hathaway's shares increased by only 67 per cent against gold's 428 per cent, so gold was a massive 6.4 times better. The average of all of the commodities in the table was 346 per cent – that's 5.2 times better than Berkshire Hathaway's shares. Hats off to Jim Rogers!

Once again, the UK is the sick man among world stock markets, underperforming even Japan. But emerging markets have turned in awesome performances, especially the so-called Brics – so well done Jim O'Neill! The average gain was a whopping 254 per cent – 3.8 times better than Berkshire Hathaway's shares.

You might argue that Mr Munger and Mr Buffett have no control over Berkshire Hathaway's share price – the market sets that. So consider something they do control, namely the net asset value (NAV) of the shares. During the last 10 years the NAV per share (currently including $49bn of goodwill) has risen by 132 per cent. Taking that figure improves Berkshire Hathaway's comparative performance. However, the average overseas stock market with 254 per cent still beat Berkshire Hathaway 1.9 times and the average commodity with 346 per cent by 2.6 times. And gold, the investment of choice for irrational jerks, is still in a class of its own with 428 per cent – 3.2 times better than Berkshire Hathaway.

Asian-based analyst Marc Faber has offered an explanation for why a company like Berkshire Hathaway can do well in its own backyard, but compares poorly in international terms. He wonders how long it will take for Mr Munger and fund managers like him to look in the mirror, face the truth and ask themselves why their performance in paper confetti terms is okay but is a disaster in terms of hard currencies. When they do, he says, the game will be up for many fund managers, whom he describes as "paper shufflers".

In fairness, a dearth of domestic investment opportunities has led Berkshire to look overseas. In 2006, it purchased 80 per cent of Iscar Metalworking, a toolmaking company in Israel, and this was followed in recent years by Chinese investments: BYD, the battery and car manufacturer, and PetroChina, the largest oil company in China. It also has stakes in South Korean steel-maker Posco and French pharma group Sanofi-Aventis.

In 2007, Warren Buffett made a major currency bet on the Brazilian real. He told his adoring stockholders at the Berkshire Hathaway annual meeting that it would "surprise" them, and it was a very good choice. Also, between 1997 and 2006, Berkshire Hathaway accumulated 130m ounces of silver, a significant proportion of the world's yearly supply – although he sold out much too soon. As Mr Buffett is fond of saying, things are always clearer in the rear-view mirror.

The internationalisation of Berkshire Hathaway suggests to me that its performance should be judged on a world stage, not a domestic one. On the evidence of the figures above, it has some catching up to do.

The American Heritage dictionary defines a jerk as: "a contemptibly naïve, fatuous, foolish, or inconsequential person". I am sure that Charlie Munger could not have had John Paulson in mind when he used the word. This investment titan, unlike most fund managers, anticipated the credit crunch and made a fortune during it. He is well known now for his present enthusiasm for gold.

In conclusion, I believe that Mr Munger should be more open-minded and less parochial, and I'd remind him of his own advice: "Recognise reality even when you don't like it – especially when you don't like it".