Lessons from Warren Buffett – stocks, real estate and gold.

Monthly AIRE Perspectives – August 2022


Dear Friends and Valued Clients,

Please see below for The MAP – Monthly AIRE Perspectives for this month. We encourage you to read this newsletter in full each month, as we do our best to keep it short, but extremely pertinent! For the next two months, we will focus on some important lessons from Warren Buffett.


YOU ARE INVITED! Two Special Events with Blackstone

Lessons from Warren Buffett: Part 1 of 2 (Part 2 Coming Next Month): On Stocks, Real Estate and Gold

During most downturns in the economy, particularly ones in which both stock and real estate markets slow down, fear of the downside often turns investors toward gold. Yet, in the long run, this is an asset class that has not produced returns remotely close to those of stocks and real estate. Here is one chart that illustrates this from 1980-2021:


Stocks and real estate both obviously have price volatility, and while both have had occasional 10-year periods of zero or even negative returns, those periods have historically been extremely rare. At the same time, even though gold – and other commodities – have had similar volatility with far lower returns historically, we are not altogether against commodities, as they can provide diversification in portfolios and reduce the risk of the overall portfolio. Yet, we generally prefer more diversified commodity exposure, rather than just gold, and we only recommend a 2-4% allocation to broad commodities. Our general philosophy is this: we would never bet against stocks and real estate in the long run, as that has historically been a losing bet, but we would also not put all our eggs in those baskets just because they have been consistent performers historically. Our base case is that long-term investors should invest a higher percentage of assets in stocks and real estate, but also hedge against these asset classes through diversification and asset allocation, in case of unusual times or unforeseen catastrophes. We will discuss the topic of asset allocation more in-depth at our next quarterly client event in the fourth quarter of this year.

But why is it that stocks and real estate have historically outperformed gold, and will likely continue to do so in the long run? Well, rather than give you our opinion on this topic, we would prefer to share the perspectives of Warren Buffett, as he wrote in a now-famous excerpt from Berkshire Hathaway’s 2011 Annual Shareholder Report (if you don’t have the time to read the entire excerpt, still make sure to read the last two paragraphs):

[One particular] major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century. This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future. The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful).

Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end. What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices. A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond. Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.


AIRE Advisors Welcomes Simone Liu

AIRE Advisors is pleased to welcome Simone Liu to our team in the role of Senior Vice President – Head of AIRE Asia Pacific!

Born in Brazil and educated in Taiwan, Simone immigrated to the United States to complete her Bachelor of Arts degree in Economics at UCLA. She subsequently completed her Executive MBA from the prestigious Cheung Kong Graduate School of Business in China.

In addition working with domestic U.S. clients, Simone is Head of AIRE Asia Pacific, leading our expansion to clients in China and the Far East, where she is deeply connected with business and civic leaders throughout the region. Simone’s multicultural roots have brought a fresh and global perspective to her clients throughout her 17-year career at major firms, including UBS, Morgan Stanley and her latest position as VP of Investments at Wells Fargo Advisors in Beverly Hills.

With her intercultural understanding of global financial market dynamics, innovative entrepreneurial skills and sterling integrity, Simone has received numerous industry accolades, including recognition by the Los Angeles Business Journal as one of “The Most Influential Wealth Managers in Los Angeles” in 2018 and 2019.

Simone is fluent in English, Chinese and Portuguese, and proficient in Spanish. She is based in Los Angeles and spends a significant part of the year in China.


Once again, we would like to thank you for your trust and loyalty, and look forward to speaking with you in the upcoming month. 


The commentary and opinions expressed in our articles on this page reflects the personal opinions, viewpoints and analyses of the AIRE Advisors, LLC employees writing the article. The articles on our website should not be regarded as a description of advisory services provided by our firm or performance returns of any AIRE Advisors, LLC’s clients. Any past performance discussed in these articles is no guarantee of future results. The views reflected in the articles are general in nature and made to provide education about the financial industry. These views and opinions are subject to change without notice. Any mention of a particular security, sector, and related performance data is not a recommendation to buy or sell that security or in that sector. Our firm manages client accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the articles. To determine what kind of investments may be appropriate for you, please consult your financial advisor prior to investing. Also, please note that all investing involves risk and the possible loss of principal capital.

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