A billionaire makes a classic investing error: Barry Ritholtz
(Bloomberg Opinion) — I try to avoid giving unsolicited advice to billionaires. They are doing just fine without me. Besides, nobody likes to hear from the cheap seats, especially when they just made a terrible, horrible, reckless investing error that poses unnecessary risk and could cost quite literally billions of dollars.
I bring this up after I read the headline “This Billionaire Has Put Half His Net Worth Into Gold” on Bloomberg News, and the story that went with it. It describes a very concentrated investing bet:
Some big investors see warning signs ahead for markets but are holding their positions. Egyptian billionaire Naguib Sawiris is taking action: He’s put half of his $5.7 billion net worth into gold.
He said in an interview Monday that he believes gold prices will rally further, reaching $1,800 per ounce from just above $1,300 now, while “overvalued” stock markets crash.
The billionaire in question, who is buying gold directly and investing in gold miners, is No. 338 on the Bloomberg Billionaires Index and comes from the wealthiest family in Egypt. His father, Onsi Sawiris, is also a billionaire who established Orascom Group. Naguib’s youngest brother is the richest man in Egypt.
But today’s discussion isn't for the benefit of the Sawiris — I assume they can take care of themselves — but to provide an opportunity for us to discuss portfolio construction, concentration, risk and (of course!) gold. The risk to ordinary investors, as we have discussed previously, is that they imitate billionaire investors who have very different risk profiles.
Let’s jump right in:
• Concentrated positions: Recall our recent discussion regarding General Electric Co. employees having too much exposure to one stock. It is no different for any asset class: concentrated positions hold lots of upside potential as well as lots of downside risk.
• Investment by forecasting: Inherent in this concentrated bet is a forecast: At some point in the not-too-distant future, gold will be X percent higher. That may or may not come to pass. However, market history teaches us that making bets based on forecasts is an unrewarding way to deploy capital. We as a species simply lack the ability to see what the future will hold. Humans are terrible at making investments based on those sorts of guesses.
• Overvalued stock markets crash: Again, a forecast, and a fairly extreme one. Hardly the basis for making a multibillion-dollar capital allocation.
It also reflects a misunderstanding one’s own abilities to time the market based on valuations. Markets have spent most of the past 30 years, except for immediately after the huge crashes of 2000 and 2008, as overvalued. There is little in the data to suggest that people can effectively time their investments, on valuation or on any other basis.
• Forecasting track record: Has the forecaster generated above-average market returns based on their predictions? If they have, is because of their skill, or was it merely random luck?
Most forecasts reflect emotions and wishful thinking. They are not the stuff of a good investing process.
• Already in the price: People seem to misunderstand what is already known and therefore reflected in market prices. A perfect example is the gold bug tendency to cite the cultural significances of gold in societies like China and India. They are absolutely correct: in those countries, gold acts as status symbols, store of wealth and as a wedding dowry. But here is the thing: it has done this since time immemorial. That is why it is already reflected in gold’s price.
The key for asset price movement is not that the historical buyer is already reflected in the market, but rather the next marginal buyer is not yet incorporated in prices.
• Why invest? An important yet overlooked part of the investing process is this simple question: Toward what aims and goals are you deploying your capital? Excuse my Financial Planning 101 talk, but depending upon the answer, there is a specific and appropriate level of risk commensurate with your goals.
It is challenging to imagine having 50 percent of your net worth in any single investment. Note that founders such as Bill Gates, Steve Jobs, Jeff Bezos and Warren Buffett let their sweat equity ride while they spent decades building the companies for which they are known.
Is that what is happening here? Could be. Or maybe he is just:
• Talking his book: Perhaps this is merely hyping the extensive holdings in gold and gold miners Sawaris already owns. Last year, he launched a “new investment vehicle to acquire gold-mining assets across the world, expanding on the nearly $1.5bn of assets he owns in the sector,” according to the Financial Times. The investing company will be “buying operational gold mines” around the world. This seems to be the offspring of a failed merger attempt of two of Sawiris’s mining investments, Endeavor Mining and Acacia Mining last year.
Investors are advised to look skeptically at anyone promoting an investment position that they already have a substantial stake in. Consider the gold miners as a class. Since inception in 1993, the NYSE Arca Gold Miners Index has returned about 15 percent. During the same time period, gold has returned 268 percent, while the Standard & Poor’s 500 Index has gained roughly 800 percent. The gold miners are lagging the metal for obvious reasons — execution risk, management and company costs and so on. Even worse, since the SPDR Gold Shares exchange-traded fund was introduced in 2004, investors buy it rather than shares of the miners as a proxy for the metal. Time will tell if Sawiris’s forecasts end up being correct. But we don’t need to wait to identify his portfolio as a concentrated and risky bet. That’s not the best way to manage personal wealth, even when its measured in billions.
(Written by Barry Ritholtz)