A lot of the time, the findings that go into financial studies and the rest are actually based on quite short data sets in the grand scheme of things. Perhaps 200 years max of good data.
That means some of the investing truths we take for granted can rightly be called into question from time to time as conditions change.
One bit of news that caught my eye over the weekend was that Warren Buffett has apparently invested more than half a billion dollars into Barrick, one of the world’s largest gold miners, while selling down holdings in banks such as Wells Fargo, JP Morgan, and Goldman Sachs.
Here’s what Buffett (allegedly) said about gold in a speech at Harvard in 1998:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
It seems like that stance has changed slightly. Another quote that is tricky to attribute: ‘When the facts change, I change my mind - what do you do, sir?’
It reminds me of efficient versus adaptive markets. Efficient markets was an academic idea that implies it is impossible to ‘beat the market’ consistently on a risk-adjusted basis since market prices should only react to new information. Most subscribers will not recognise this description of the markets. EMH has had its day in the sun.
Adaptive markets is a more intuitive idea which acknowledges that unknown human variable, suggesting that conditions evolve as competition, adaptation and natural selection do their thing. Things change and some ‘fundamental’ financial truths actually have an expiry date. Think of how hard it can be to describe software and IT values using traditional price to book metrics, for example. The world has moved on from Benjamin Graham’s world of deep value.
It’s worth bearing in mind that one of Buffett’s first big investments, and Berkshire’s namesake, was an on-its-knees textile mill in 1962. The Omaha got in just as the world was changing and those old US textile mill economics no longer stacked up.
Thankfully he saw the writing on the wall and got into insurance instead and the rest is history. Decades later he would call Berkshire Hathaway the ‘dumbest’…
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