Many Drawn by Silver’s Shine on Buffett Table

Your old Aunt Maude, with her cherished, if tarnished, silver tea set that sits unused in her dining room hutch, may be feeling like Warren Buffett’s muse after last week.

With billionaire Buffett’s disclosure Tuesday that he owns 130 million ounces of silver, the metal’s price soared--lifting the scrap-metal worth of Aunt Maude’s tea service to a nine-year high.

“I know this has value,” Maude used to say about the tea set that nobody but she wanted. And Buffett, after 30 years of following silver’s fundamentals (that’s according to him), finally agreed last July, when he began buying the metal in volume via futures contracts.

Ultimately, that is the only thing we can confidently assume from Buffett’s surprising announcement: that he saw value in silver at the prices that prevailed between July 25 and Jan. 12, when he says he stopped buying.

But because this is Buffett the Investment Legend, many people are searching for the subtext in his $915-million silver cache.

Anyone who believes that the U.S. stock market is grossly overpriced might suggest that Buffett’s channeling of such a huge sum into silver--instead of stocks, which is where Buffett has made most of his $26-billion fortune over the last 40 years--is a clear indication that the master investor sees no value at all in the stock market.

But as Buffett has long stressed, he doesn’t spend much time looking at “the market.” He studies individual investments, and a fairly limited field of them at that. He does not, for example, bother with technology firms. So it’s fair to say that if value did exist in the tech sector, Buffett wouldn’t know about it--but you might.

(“Bill Gates could do what I do--but I can’t do what he does,” Buffett told a Caltech audience in October, explaining that his aversion to tech stocks like Microsoft is based on his being unable to adequately understand the basic businesses.)

Last week, another suggestion from Wall Street’s bear camp (a.k.a. the Lonely Guys Club) was that Buffett must believe that inflation is about to come roaring back, because “hard” assets such as silver have traditionally been used as inflation hedges.

*

But that idea, too, seems like a major stretch. As Roger Lowenstein noted in his 1995 book, “Buffett: The Making of an American Capitalist,” the 67-year-old Buffett has never wasted his time trying to predict turns in macroeconomic indicators. What’s more, Buffett was rumored to be a big buyer of long-term bonds last summer--not exactly the investment you’d make if you thought higher inflation was on the horizon.

It would probably be best to simply take Buffett and his Los Angeles-based partner, Charlie Munger, at their word: “In recent years, widely published reports have shown that [silver] inventories have fallen very materially, because of an excess of user demand over mine production and reclamation,” the two said in a statement.

Hence, they concluded that the market was undervaluing silver, and that “equilibrium between supply and demand was only likely to be established by a somewhat higher price.”

Silver’s price on July 25: $4.32 an ounce. The price now: $7.04. Change: up 63%.

Naturally, what some investors immediately decided last week is that if silver is good enough for Buffett, it’s good enough for them. The price jumped 7% between Tuesday and Friday in the wake of Buffett’s announcement.

But if silver belongs in Buffett’s portfolio, does it belong in yours? “Piggybacking” on others’ investments doesn’t require much mental exercise, of course. Which means that piggybacking is the antithesis of Buffett’s investment philosophy, which emphasizes extensive research into an asset’s fundamentals.

*

In his Caltech speech, Buffett explained how he stays within his “circle of competence” in picking investments--that is, he wants to know all that he can know (and that is important) about an investment, but only after he is confident that he can understand the basic business in the first place.

With any individual stock, Buffett advised the Caltech audience, “think of it as a business [first]. If it’s one you don’t understand, go on to the next one.”

While the commodities market hasn’t historically been Buffett’s turf, he and Munger obviously felt they could reasonably evaluate the silver business--and, most important, that they could see the metal’s intrinsic value.

Which is exactly why, with almost anything that Buffett buys, some investors feel that it’s perfectly all right to just blithely piggyback. Their reasoning is that 1) Buffett has already done the homework on the investment 2) Buffett typically buys for the long term, not to trade and 3) Buffett’s track record speaks for itself.

Consider: Buffett disclosed in 1989 that he had acquired 7% of Coca-Cola shares. At the time, many on Wall Street believed Coke’s stock was overpriced. If you ignored the critics and bought with Buffett, your investment today would show an eightfold gain. For the same period, the blue-chip Standard & Poor’s 500 index is up less than threefold.

It’s also true that Buffett has made some mistakes--and he has been candid about them. He almost made a very big mistake two years ago, when his investment in US Airways was on the skids as the airline suffered huge losses. The disappointed investor wanted to sell back to the airline the preferred stock he had acquired in 1989.

As it turned out, US Airways saved Buffett from himself by declining to buy back the stock. Buffett held on, and US Airways’ health improved dramatically--so much so that last week the airline said it now is ready to redeem Buffett’s $358-million stake, yielding a profit of more than $200 million.

*

The near miss with US Airways, while perhaps confirming that Buffett is mortal, is on a short list. His serious mistakes have been few, and Buffett has made avoiding them a principle. One of the secrets to his enormous success, he said at Caltech, is that “I’ve never had big losses.”

And that, Buffett said, is largely a function of his unwillingness to “swing” at the vast majority of investment ideas. “The truth is, you only get a few good ideas in your lifetime,” he said during the address.

But is it practical for the average person to think that by following Buffett’s basic rules, almost anyone can reap spectacular returns?

If a few rules were the only things standing between you and billionaire status, there would be more billionaires than lawyers. (Not an unpleasant thought!)

The truth is, Buffett is a very rare occurrence. His ability to beat the market for so long has frustrated those “efficient-market” theorists who maintain that it should not be possible for anyone to have Buffett’s record.

In Robert G. Hagstrom Jr.’s 1994 book, “The Warren Buffett Way,” the author describes the efficient-market theorists’ explanation for Buffett: He is what is known as a “five-sigma event: a statistical phenomenon so rare that it practically never occurs.”

*

What’s more, it can be argued that his continued success may be self-fulfilling, because his presence in an investment automatically brings others into that investment--the piggybackers.

Buffett may not have much respect for piggybackers, but it’s easy to understand why those investors figure they could do a lot worse than following him, lemming-like, into stocks like Gannett, Gillette, Wells Fargo and Freddie Mac--and now, into silver.

(An even simpler strategy: Buy shares of Buffett’s holding company, Berkshire Hathaway. The Class B shares hit a record $1,794 on Friday, then closed at $1,779 on the New York Stock Exchange.)

But remember: You’re investing with a man whose time horizon is decades, not days. To get very rich, Buffett said at Caltech, “it’s better if you’re not in too much of a hurry.”

Tom Petruno can be reached at tom.petruno@latimes.com