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Rupert Hargreaves
Rupert Hargreaves
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Warren Buffett's Giant Silver Trade

The guru bought nearly $1 billion worth of silver back in the 1990s

July 10, 2019 | About:

Warren Buffett (Trades, Portfolio) has made it clear in the past that he is not interested in owning gold because it does not meet one of his fundamental principles of investing; that investors should only own things that are useful and serve some purpose or create value. Gold, according to the Oracle of Omaha, does not do anything "but sit there and look at you." 

While he might not be interested in the yellow metal, the renowned gur has invested a substantial amount of money in silver in the past. In 1997, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) took advantage of a market dislocation to spend around $1 billion buying silver, a trade that worked out quite well for Buffett and his investors.

This is one of a handful of trades Buffett has executed over his career that does not fit into his standard investment template. Known primarily as a long-term equity investor, over the years the Oracle of Omaha has traded a selection of other assets, including corporate bonds and silver.

Buffett's giant silver trade

At the 2006 annual meeting of Berkshire Hathaway shareholders, Buffett gave the company's owners some insight into why he decided to execute the trade at the time. "The original decision — my decision — was that the production of silver and the reclamation of silver — I don't remember the numbers exactly now — but they were running, perhaps, 100 million ounces or thereabouts, less than the consumption," he said. Berkshire acquired around 130 million ounces of silver for this trade.

He went on to explain that while there were vast quantities of silver above ground that were being reclaimed and used to produce things like silver jewelry, overall, the market was in deficit. "Silver was being produced and reclaimed at a lesser rate than it was being consumed," Buffett said.

Interestingly, Berkshire's chairman and CEO then went on to say the company did not make much money on the trade and it is generally a bad investment:

"And added to that was the fact that there are relatively few pure silver mines. Silver is largely produced as a by-product of copper and lead and zinc, and so that it was not easy to bring on added production. So, all of that added up to the fact that I thought that silver would get tight at some point. And, as I said, I was very — I was early in that conclusion, and I was early in selling.

So we have no silver now, and we did not make much money on it. And you're right that it doesn't earn anything. So you sit with it. It's not like sitting with a stock where, in most cases, earnings are piling up for you. You have to hope that it — you have to hope that a commodity moves in price, because it is not producing anything as it sits there looking at you. And that's one of the drawbacks of commodities."

These final comments could be interpreted as an admission of making a mistake. While Buffett did not say he made a mistake outright, it does seem as if he was inferring he wouldn't repeat the trade if offered the same opportunity in the future. Charlie Munger (Trades, Portfolio) added his two cents after Buffett's comments, saying:

"We didn't get where we are by owning noninterest-bearing commodities. I don't think it's a big issue around here."

So there we have it. A bit of background on why Buffett decided to buy silver back in the late '90s, and some explanation as to why he probably wouldn't do it again. Although Berkshire ultimately made a profit on the trade, it is possible the conglomerate would have made more by investing the money in the market instead of the non-interest-bearing commodity at the time. A valuable lesson for other investors.

Disclosure: The author owns shares of Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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