Dear PGM Capital Blog readers,
In this weekend blog article we want to discuss with you the investment strategies of some world class investment gurus that might indicate that they are preparing themselves for a coming hyperinflation cycle.
DEFINITION INVESTMENT GURU:
An Investing Guru is someone who is considered an experts in their professional field of trade and Investing.
Only a handful of people in this world can qualify as investment Gurus. We have carefully identified a number of investment Gurus based on their long-term track record.
To qualify for our Guru Hall of Fame, an investor needs to meet at least three criteria:
- Long-term outstanding performance;
- More than US$1 billion under management;
- Low portfolio turnover.
Some of world’s well known investment gurus are: George Soros, Carl Icahn, John Paulson, Marc Faber, Jim Rodgers and the legendary Warren Buffett.
HYPERINFLATION:
In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency, and causing the population to minimize their holdings of the local money.
There are a number of theories on the causes of high and/or hyper inflation. But nearly all hyperinflations have been caused by government budget deficits financed by money creation. After an analysis of 29 hyperinflations (following Cagan’s definition) Bernholz concludes that at least 25 of them have been caused in this way.
A sharp decrease in real tax revenue coupled with a strong need to maintain the status quo, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.
Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of the hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. But one of the most important characteristics of hyperinflation is the accelerating substitution of the inflating money by stable money, gold and silver.
BEST KNOWN EXAMPLE OF HYPERINFLATION:
The hyperinflation in the Weimar Republic, which is one of world’s best known hyperinflation, was a three-year period of hyperinflation in the Weimar Republic (modern-day Germany) between June 1921 and January 1924.
In this period the value of the ‘Reichs-Mark” depreciated from 90 Reichs-Mark in 1921, to 210,500,000,000 Reichs-Marks, by the end of November 1923.
In the same period the price of gold measured in Reichs-Mark appreciated from approx. 10 Reichs-Mark per Troy ounce to 1 Trillion Reichs-Mark by the end of 1923, as can be seen from below chart.
PGM CAPITAL COMMENTS:
In order to understand inflation we must think of the way ripples spread out when you drop a pebble in a pond. Inflation, moves in concentric circles from a small core of people to an ever widening group of affected individuals. The rich and powerful are in the inner circle and see the inflation first. This gives them time to prepare.
Inflation moves in concentric circles
The working and middle class are in the outer circles and see the inflation last.
They are the victims of lost purchasing power.
Due to the above it is important for us to analyse and understand the investment strategies of the rich and investment gurus.
Warren Buffett:
Here’s what Buffett’s been doing, which can be a sign that he’s getting ready for high rates of inflation:
- He bought the Burlington Northern Santa Fe railroad in 2009. It consists of hard assets in the form of rights of way and it makes money by moving hard assets such as ore and grains.
- He purchased large offshore assets in China and other places to produce non-dollar profits that can be retained offshore tax-free
- He have add 4 million shares of Canada Oil and Natural gas producer, Suncor (TSX: SU) to his portfolio in February of this year.
- He also owns financial stocks, particularly in banks and insurance companies. These companies are highly leveraged borrowers. These debts will be wiped out by inflation in due time.
Warren Buffett can now move his Suncor oil in his Burlington Northern Railroad, while generating non-U.S. dollar denominated profits and keeping them abroad tax free at the same time that his Financial investments see their debts disappear thanks to high rates of inflation.
George Soros:
Soros has been silently building positions in mining companies rather than the underlying commodity itself. Presumably, this is because mining firms stand to benefit even more if metal prices rally because of the inherent leverage in the business.
Carl Icahn:
Carl Icahn, the billionaire investor whose investment portfolio got stung by the drop in crude oil prices, has added 6.6 million shares of Chesapeake stock (NYSE: CHK) to his portfolio.
Besides Chesapeake Energy, he is also a major share holder in energy stocks like Transocean (NYSE: RIG) and CVR Energy (NYSE: CVI).
John Paulson:
John Paulson is the President and Portfolio Manager of Paulson & Co. The guru became a guru by short-selling subprime mortgages in 2007, but is most known for his stance on gold.
He currently holds 10,234,854 shares of Spider Gold Trust (NYSE:GLD), which makes him the biggest holder in this ETF.
SPDR Gold Trust, which holds 1,239 tonnes of Gold, is one of the top ten largest holders of gold in the world.
Conclusion:
The conclusion we can draw from the above is that these investment gurus took their time to build hyperinflation-proof portfolio.
So, when the push comes to shove their assets will explode in value and their debts are eliminated.
If this strategy works for these investment gurus, it’ll work for you too.
Invest in hard assets – precious metals, rental real estate, collectibles, etc – and keep some of your money abroad.
These gurus are preparing for hyperinflation and you should too.
Last but not least, before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Until next week.
Yours sincerely,
Eric Panneflek