Buy Gold, Forget About Your Grandkids - 2 June 2010

"Buy Gold for yourself," says fund manager David Einhorn. The debt crisis will strike soon...

"GOOD NEWS for the Grandchildren" was the title of David Einhorn's speech last Wednesday at the Ira Sohn Conference in New York. I was there, writes Steve Sjuggerud in his Daily Wealth email.

"Are you worried that we are passing our debt on to future generations?" Einhorn began...
 
"Well you need not worry. Our generation – not our grandchildren's – will have to deal with the consequences..."

Einhorn is worth listening to. (His latest ideas are outlined in this New York Times article.) Einhorn's investment success has made his hedge-fund customers wealthy. He's earned them more than 20% per year compounded, after fees.

Einhorn famously revealed that Allied Capital was defrauding the government. He wrote a great book about his six-year battle with Allied, called Fooling Some of the People All of the Time. All value investors should read it. (He first publicly stated Allied was defrauding the government at the 2002 Ira Sohn Conference.)

Einhorn also "almost made it to the final table" at the World Series of Poker main event in 2006. He donated his $659,730 in winnings from that event to the Michael J. Fox foundation for Parkinson's Research. And then in the spring of 2008, Einhorn publicly predicted the death of Lehman Brothers...taking a sizeable position in Gold Bullion as the financial crisis wore on, and switching it from a trust-fund position to physical gold in spring 2009 so as to cut his clients' annual costs. [Ed. note: It's cheaper to buy and own Gold outright and hold it in secure storage that to hold shares in Gold ETFs...]

So he's smart, a successful investor, and a good guy. He's worth paying attention to.

Einhorn believes the United States could face a Greece-type debt situation much sooner than anyone thinks (in our generation, not our grandkids'). He brought up civil servant pay as an example of a US crisis in the making similar to Greece.

Einhorn explained how, in 2008, the average US federal civilian salary with benefits was $119,982, compared to $59,909 for a non-government worker. And when you have a government job, you can work for 20 years and then retire, getting retirement pay the rest of your life (the next 40 years). Einhorn questioned the sustainability of those entitlements.

Einhorn wasn't the only speaker at the conference. His hedge-fund-manager peers shared their favorite ideas as well. Most speakers at the conference held a similar view to David's.

The optimistic take was essentially that:

"People are adaptive...We'll figure out how to adapt to these times, and make money out of them. There's never been a catastrophe that you can't see coming. If you can see it coming, then you can adapt."

To invest in this difficult time, David said to Buy Gold and gold stocks...and worry about your grandchildren later.
 
As he said:

"When push comes to shove, there's a good chance the Fed will print money to the point where significant inflation shows up."

Einhorn's favorite Gold Mining stock was African Barrick Gold – which I admit I am not that familiar with. It trades in London, at what Einhorn believes is a significant discount to its gold-mining peers.

If Einhorn says it's worth checking out, then check it out.

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