Tuesday, February 10, 2009

Paradigm shifts - right in front of your eyes!

Watching history evolve and people's reactions to it is always interesting. Phrases that are no longer true are clung to like:

"Gold is a barbarous relic."
"Stocks are the best investment for the long haul."
"Warren Buffett is the greatest investor of all time."

This last one is funny to me in particular. Buffett rode the wave of the greatest secular bull market in American history by holding onto strong companies "forever." This is a great strategy in a bull market. But how about in a bear market? You would think a guy like Buffett, since he is the greatest investor of all time, would steer his company to a large degree of outperformance relative to the general markets, right? WRONG. REALLY, REALLY WRONG.

Look at a 12 year chart of Berkshire Hathaway (BRK.b) stock, with the Dow Jones Industrial Average at the bottom of the chart for comparison:

Now, I already know the replies from those that want to cling to fantasies, heroes, and outdated paradigms: Warren's just in a slump. These are the same people who point to the fact that the gold price has gone nowhere in 30 years. We'll get to see whether gold or Warren Buffett is a better investment in the next few years. Once gold is proven right, it will be too late for those who insisted on a prophet and didn't want to do their own homework.

Today was an important day in the general markets in my opinion. The general indexes (i.e. S&P 500, Dow) wiped out a few weeks worth of range trading in one fell swoop on decent volume. Let's just say I didn't close any of my short positions in KSS, NEM, GFI or PAAS. I even added a little DZZ (double short gold ETN) near the close today in anticipation of a short-term gold price drop. Full disclosure: profits from these trades will be used to buy and hoard more barbarous relics.

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