Sean Ring

Editor, Rude Awakening

Berkshire Hathaways Annual Shindig

The last thing most human beings want to do is watch two nonagenarians dodder about, talking about the good old days. But that never applies to the Berkshire Hathaway annual meeting, where investors around the world hang on every word 90-year-old Warren Buffett and 97-year-old Charlie Munger utter.

And no wonder, as their folksy, down-to-earth investment wisdom plays very well to the younger, poorer peanut gallery. Ill let you in on a little talked about secret: if you live nearly a century, buy and hold investing will almost certainly work for you!

The best part about living as long as they have - and God bless em for it - is that the many good years wash out the occasional bad one or two. But as actuarial reality catches up to our geriatric duo, times running out to beat the market again.

Berkshire Hathaways returns have lagged the S&P 500 for two years now. In 2019, Berkshire returned a respectable 11%, while the S&P 500 returned 31.5%. In 2020, Berkshire only returned 2.4%, while the S&P 500 recovered from an awful March to return 18.4% on the year. In 2020, Berkshire suffered an $11 billion writedown on one of its businesses, denting the return.

Buffett writes:

The final component in our GAAP figure that ugly $11 billion write-down is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (PCC), and I paid too much for the company.

No one misled me in any way I was simply too optimistic about PCCs normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCCs most important source of customers.

It happens to the best of them.

Interestingly, however, value stocks seem to be making a miraculous comeback against growth stocks.

This can also work in Buffetts favor. Although hes made a boatload on Apple stock, Buffetts bread and butter is value investing. Expect Berkshire to have a better year this year.

Charlie Hates Bitcoin

Let me preface this section by categorically stating:

• Im not a Coiner (someone who owns a cryptocurrency).
• I dont have Diamond Hands (holding my position so hard I could crush it into diamonds).
• Im not HODLing (a hilarious misspelling of holding, now also taken to mean Hanging On for Dear Life).

We at the Rude are currently writing a new cheat sheet for all these new acronyms. Stay tuned.

Yesterday Charlie Munger, Warrens best friend and right-hand man, unloaded on Bitcoin:

Of course, I hate the bitcoin success, and I dont welcome a currency thats useful to kidnappers and extortionists, and so forth. Nor do I like just shoveling out a few extra billions and billions of dollars to somebody who just invented a new financial product out of thin air. So I think I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization. And Ill leave the criticism to others.

First, every currency is useful to kidnappers and extortionists. Not just Bitcoin. Ask yourself this: why do drug lords prefer euros to dollars? (Its the 500 euro note. Lighter to carry.)

Second, is Bitcoin genuinely contrary to the interests of civilization? Certainly, its contrary to the interests of The State and anyone else who wants to control the money supply. I remember a certain F.A. Hayek arguing for competition among currencies. He wrote a book about it in 1976 called The Denationalization of Money.

But the subject that won Hayek the Nobel Prize in 1974 is coming to the fore rather quickly.

The Inflation Trade is On

Hayek won the Nobel Prize in Economics for his work on business cycle theory. From the Nobel webpage:

Hayek showed how monetary expansion, accompanied by lending which exceeded the rate of voluntary saving, could lead to a misallocation of resources, particularly affecting the structure of capital. This type of business cycle theory with links to monetary expansion has fundamental features in common with the postwar monetary discussion.

Heres the Federal Reserve Balance Sheet:

The Fed prints money to buy U.S. treasury bonds, agency bonds, and corporate bonds nowadays. Its led to an explosion in the money supply.

Hayek and other Austrian School economists define this money printing as monetary inflation. That monetary inflation should lead to explosive price inflation. This price inflation hasnt materialized just yet. But it looks like we may finally see it.

Think of price inflation not as a sustained rise in the average price level. Thats just one definition used by Keynesian economists.

A better way to think of price inflation is that its a tax levied by a central bank instead of a legislature. This tax purposely and purposefully is imposed to reduce your purchasing power as time goes on. By doing this, governments and central banks believe youll spend your money quicker.

They do this because they wrongly believe that consumption leads to production rather than the other way around.

Yes, this part of the game is blatantly and rather nakedly rigged.

In yesterdays Rude, we talked about stocks, commodities, and real estate benefitting from this inflation.

Were seeing substantial inflation, he said.

This reduction of purchasing power is one of the reasons Bitcoin was invented, to begin with. That, and the ridiculous bailout of the banking system in 2008. The below picture was included in the Bitcoin blockchain genesis block. (The genesis block is the first block in a blockchain.)

Whoever Satoshi Nakamoto, the purported creator of Bitcoin, is, he or she was unhappy with the taxpayer-funded bailout.

And speaking of less money to spend...

Bill and Melinda Call It Quits After 27 Years

Following in Amazon founder Jeff Bezos and his ex-wife Mackenzies footsteps, Bill and Melinda Gates have called time on their union. After 27 years, they didnt believe they could grow together anymore.

Since Ive only been married for a touch under ten years, I dont understand the point of spending so much time together and then deciding to go separate ways. Another 17 years may make that clearer to me, but I hope not.

Was it all Foundation and no play? Bills annoying obsession with sticking everyone with a needle? Melindas increasingly alarming resemblance to the late, great Walter Matthau?

Who knows? Its none of my business anyway.

But Bill, youve got nothing to worry about. As my great entrepreneurial friend often says, Cash is the best cologne. And youve got yacht loads of it.

Of course, the couple asked for space and privacy, despite intruding on your medical choices. Oh, the irony!

With that, I leave you to your day.

Have a great one!

All the best,

Sean Ring