Do you regard commodities as investments? If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation.

Zweig:

In your book, Margin of Safety, you said as a general rule that commodities, with the possible exception of gold, are not investments because they don’t produce cash flow. Do you regard commodities as investments in today’s market?

Klarman:

No, I don’t. In the book, I was mostly singling out fine-arts partnerships and rare stamps—addressing the commodities that were trendy then. Buying anything that is a collectible, has no cash flow, and is based only on a future sale to a greater fool, if you will—even if that purchaser is not a fool—is speculating. The “investment” might work—owing to a limited supply of Monets, for example—but a commodity doesn’t have the same characteristics as a security, characteristics that allow for analysis. Other than a recent sale or appreciation due to inflation, analyzing the current or future worth of a commodity is nearly impossible.The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation. The hardest commodity-like asset to categorize is land, an asset that is valuable to a future buyer because it will deliver cash flow, not because it will be sold to a future speculator.  Gold is unique because it has the age-old aspect of being viewed as a store of value. Nevertheless, it’s still a commodity and has no tangible value, and so I would say that gold is a speculation.  But because of my fear about the potential debasing of paper money and about paper money not being a store of value, I want some exposure to gold.

Zweig:

Benjamin Graham drew a sharp and classic distinction between investment and speculation. I believe his exact words were, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”  But Graham sometimes speculated over the course of his career. So, maybe regarding commodities as speculative doesn’t  preclude you from owning them, right?

Klarman:

I would say that a commodity’s speculative nature is not what precludes investment. When Graham was talking about safety of principal, he was not referring to currency.  He wasn’t really considering that the currency might be destroyed, but we know that can happen, and has happened, many times in the 20th century.  The investing game has historically been closer to checkers, but now it is more like chess—almost in three dimensions. The possibility that the dollars you make could be worth much less in the future leads an investor to think, How can I protect myself?  Should I be shorting the dollar against another currency, and if so, which one?