tech punditry and investment advice

I am obviously not a daily reader of MG Siegler's ParisLemon as I am commenting on something that was posted last week, which in mobile years might as well be last century. Anyway, the particular post is nerdspasm worthy - if you just so happen to be into both tech and finance.

Conveniently, I am.

Siegler links to Chris Dixon posting Warren Buffett's annual shareholder letter as CEO of Berkshire Hathaway (more specifically, the parts that are purposefully released PR-style for public consumption; the full letter is more detailed). Siegler's commentary reads (mostly)

Ask anyone why gold is so valuable and they’ll immediately tell you that it’s a rare commodity. And that’s true. But beyond its decorative value, which is minimal at best, what value does it actually produce? Very little.

Well, very little beyond selling it to the next fool who will pay more for it.

I don't know whether Siegler is casually interested or follows this more closely, but Buffett's letters are always fun fodder for the investment world and in particular the 2011 letter is quite remarkable. Indeed, this letter is darn near infamous.

First, Buffett yet again exemplifies that being a billionaire does not cause stupidity; it really is possible to be rich and maintain some touch with reality. Specifically, he acknowledges in the letter that he was wrong on housing finding a bottom. Contrast that kind of directness with how Manhattan financial firms operate, like Goldman Sachs Chief Financial Officer David Viniar giving his incoherent explanation of 25 standard deviation moves. Actually, don't contrast them. It will just make you cry (whether over math or the failing of our institutions, is in your hands). It's not that Buffett is always right, but that he puts his thoughts out there.

Second, Buffett has thrown himself in the midst of what has to be one of the greatest not-really-that-important controversies in the history of the internet. Except that if it's not important, why mention it?

And therein lies the rub. Warren Buffett is in the business of profiting off of information asymmetries. He wants to buy undervalued shares and sell overvalued shares. Warren Buffett, in other words, practices the art of the greater fool theory. He believes that fools exist at both ends, in fact! People dumb enough to sell him shares at below real value and people dumb enough to buy shares at higher than real value.

Once you see that Buffett is talking his book, in fact specifically referencing holdings like Coke and See's, the particular commentary on gold becomes even more fascinating. He needs people to put their money in financial assets because that's where he has leverage - political access, business contacts, legal resources, etc. Precious metals are a huge threat to that power base, not because they realize a return, but because they're not in the business of generating returns. Investing is incredibly risky. Saving is an entirely different endeavor - the whole point is to transport today's capital in a form accepted tomorrow, not to generate additional capital tomorrow. There are basically three types of precious metals investors: 1) conspiracy theorists/doomsday preppers, 2) savers, and 3) speculators. Note that while we colloquially use the word investing to describe this, none of these three types of activities are actually investing in the financial sense of the word. What's really dangerous is when people end up investing when they think that they are saving*.

(I of course do not give official financial advice, legal advice, tax advice, marriage advice, cooking advice...but personally, I am a big believer in investing in stocks. That is in no way inconsistent in also believing in saving in much safer vehicles that have nothing to do with equities, nor is it inconsistent with also believing in the value of diversity over concentration.)

It's the relationship between value and price that determines whether 'something' is a good investment or not. The utility of that something for some other purpose is irrelevant*. After all, if Buffett was simply a buy and hold forever investor, how come he sold all that Exxon Mobil stock he's so interested in talking about? If he is so focused on productive assets, why does he invest in companies that are so unproductive that they require government bailouts just to stay afloat?

So Siegler, if you really think gold has minimal decorative value, why is it so valued in jewelry? It rivals diamonds in popularity and global ubiquity even though the gold market lacks the monopoly equivalent of De Beers backing it.

And I would love to know where I can get a list of the companies that are going to be productive over the next decade. If this was known, if there were no risk, it wouldn't be investing. But perhaps most plainly, the greater fools theory simply doesn't make sense. If you bought something, that means you're the fool. The natural conclusion of this advice is to steer clear of the entire (secondary) equities markets.

Michael Dell went into the investment advice business in such a famous way that he singlehandedly demonstrated the importance of knowing when people are talking their books. If someone had shorted Apple and gone long Dell a decade and a half ago, they'd be bankrupt today. In fact, they would have gone bankrupt years ago.

*Note, there are huge incentives to confuse people about this, and not just in stocks and precious metals. The housing bubble was encouraged in no small part by the National Association of Realtors and the Federal Reserve pushing people to think of housing - something of value due to its utility as shelter - as somehow synonymous with the returns of investing and the safety of saving.

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