Billionaires John Paulson, Buffett & Trump: Their Money Secrets

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money bags

The ultra-wealthy move markets, news cycles, politics and policy with equal aplomb.

THERE’S LESS GOLD IN THEM THAR HILLS

Let me introduce you to the world’s highest earner. John Paulson started Paulson & Company, a preeminent hedge fund shop. He lucratively bet against the subprime bubble in 2006 and won big.

His latest bet was a little too big, a little too bold. He started his Gold Fund in January of 2010. It hasn’t done too well. Paulson & Co. went from $36 billion in assets down to $19 billion, due in large part to the gold drop.

Paulson’s bet is even bigger, and more unique, because he created gold-denominated shares in his funds. This way you get gold exposure even on more traditionally invested hedge funds.

“We view gold as a currency, not a commodity. It’s importance as a currency will continue to increase,” said the Queens, New York native who earned nearly $5 billion in a single year.

Here’s how well that “currency” has performed since he started. Using the SPDR Gold Trust (GLD; $111.73) as a proxy for gold, it’s been flat since Paulson’s fund was created. GLD traded at $109.80 in January of 2010 and is a couple of dollars higher, as of this writing. Also, the SPDR fund was as high as $185 during that time and is now 40 percent lower.

Take-away: beware of too much exposure to a single asset class.

THE REAL-ESTATE-TURNED-POLITICAL MOGUL

“It’s tangible, it’s solid, it’s beautiful,” so says Donald Trump about his cherished real estate. But is it really that great?

Short answer: pretty much. Longer answer: The Donald is actually invested into quite a few different asset categories. Things like aircraft, licensing businesses and alternative real estate, such as gold courses. He also has about a third of a billion dollars in cash. These other areas produce a disproportionate amount of his cash flow.

The Forbes 400 magazine just had a 15-page expose on “The Maned One,” revealing his ups and downs. Trump was on the inaugural rich list, dropped from it for several years and has been back for two decades.

Take-away: real estate can juice up returns (and risk), help protect against inflation and provide growth, income and diversification.

THE FRUGAL BILLIONAIRE

It’s hard to find much bad to say about our last “big dog”. Investment-wise he is arguably history’s most successful. Although politically he’s gotten a bit controversial, especially regarding taxation and social causes.

I’m talking about The Oracle of Omaha, Warren Buffett.

Buffett’s approach has been the most prudent of the three. His approach is an extreme in diversification. His empire spans hundreds of companies, and stocks, in dozens of countries and industries, churning out billions in new wealth and income on a regular basis. He’s gone a long way since buying a “cigar butt” textile company named Berkshire Hathaway.

Take-away: diversification really does work. For the short-haul and the long haul.

Gold Holding Its Own…Or is It?

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Gold has sunk quite a bit since I heard prognosticators expecting $5,000 per ounce prices a few years back. Remember the times? You couldn’t pick up a paper, read a magazine or website, watch a TV show, drive down the street or listen to the radio without hearing the virtues of this shiny metal. It reminded me of the fervor of the dot-com days of the late ’90s.

Recently, Bloomberg.com had an article about gold holding steady. It’s not that steady considering that this glimmering Siren was at over $1,800 an ounce a few years back. That’s a drop of about 33 percent.

I have a client whom I recommended selling his physical gold right about at this top. He chose to invest it in a diversified portfolio with me. His account was up a little over 50 percent. Adding the avoidance of gold’s drop (about 33%) with his gain (over 50%) gives him a relative out-performance of over 80 percent compared to a gold investment.

Is gold holding steady?

A lot of folks mistakenly think that gold tracks, or even hedges against, inflation. The first link I’m sharing with you is some personal research I did several years back. The research only goes to 2010 but the point remains the same: gold does not track inflation.

I was fed up of hearing this nonsense over and over so, on that arbitrary day, I decided to make a few charts. The first one shows the rate of inflation compared to the price performance of gold, on that random day I started my homework. I tried to get as near to that day as possible in each individual year but weekends and holidays threw me off a little. Still, it’s unbiased research. I was just seeking the answer to that question: Does gold track inflation?

I heard a good answer, too: “Gold tracks the expectation of inflation.” Good answer. Big difference.

Gold Tracks Inflation? Not really…

Gold reached a top near the middle of 2011. If you look at the second link you’ll see the downward price trend since this top. If you look at even longer gold charts you’ll see that the “miracle” metal has had flat price trends that last about two decades! That’s a long time for an investor who buys at the top and wants to hold on to their position. Besides losing opportunity to other growing sectors this investor receives zero income. This would result in a net loss when you consider the ravages of inflation.

Courtesy of BigCharts.com, take a look at the SPDR Gold Trust ETF. This is an exchange-traded fund that tracks, almost exactly, one-tenth the price of gold. To get the approximate spot price of gold you just multiply this investment times ten. The symbol of the fund is “GLD”.

Gold Mutual Fund Price Trend

Bonus link: I just can’t say it better than this…

Why Warren Buffet Hates Gold