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Gold Vs. Equities: 'The Magical Metal No Match For American Mettle' - Warren Buffett

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Gold Vs. Equities: ‘The Magical Metal No Match For American Mettle’ — Warren Buffett

(Kitco News) - What would have happened if billionaire Warren Buffett made his first investment in gold instead of shares? Well, according to Buffett himself, he would have lost out on billions, the chairman of Berkshire Hathaway wrote in an annual letter to shareholders.

“On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock,” Buffett said.

That historic purchase sent Buffet in the direction he wanted to go. “I had become a capitalist, and it felt good,” he wrote.

Now, let’s imagine that Buffett would have been worried about the American economic situation and bought gold instead as a protection against inflation and market risks.

“To ‘protect’ yourself, you might have eschewed stocks and opted instead to buy 3 1/4 ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle,” Buffett concluded.

This comparison is especially relevant in the days of the U.S. national debt reaching new record highs on an hourly basis, now standing at over $22 trillion.

“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency,” he said.

In the annual letter, Buffett reminded investors that America’s impressive financial accomplishments cannot be forgotten.

“In 1942, when I made my purchase, the nation expected post-war growth, a belief that proved to be well-founded. In fact, the nation’s achievements can best be described as breathtaking. Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 … That is a gain of 5,288 for 1,” he wrote.

Buffett also highlighted that there is always fear and chaos. But, at the end of the day, markets prevail.

“Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history,” he said.

Buffett’s letter comes as Berkshire Hathaway, which holds major investments in companies like Apple, American Express Company, and Bank of America, reported a $25.39 billion net loss in the fourth quarter, or $15,467 per Class A share, reflecting more than $27.6 billion of investment losses.

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