Why The Nickel Is A Warren Buffett Style Investment
Warren Buffett, Nickel Investor?
Look Closely At The Nickel!
The Nickel.... A Warren Buffett Investment? How Do You Figure?
Some people will probably be puzzled by the above title of this article. After all, Warren Buffett is arguably the most legendary investor of our time (maybe ever). His name is indeed ubiquitous in the world of financial market coverage. The famed “Oracle of Omaha” makes regular appearances on large financial media outlets such as CNBC and Bloomberg. Many articles are devoted to what Warren Buffett is doing and saying. We see headlines such as this in financial newspapers and magazines: Whats Warren Buffett buying Now? Buffett says Gold Is Overrated! Buffett supports higher taxes on the wealthy! Buffett leads the way as a committed philanthropist! Buffett makes top echelon of billionaire’s list once again!
Then there are also lots and lots of books devoted to dissecting and analyzing the life and career of the Nebraska billionaire. To top it off there is even a blog written by hedge fund manager Jeff Matthews that is largely devoted to discussing Warren Buffett’s investment philosophy and other topics related to the famed investor. So what exactly am I talking about when I contend that those nickels dinging around in your pockets could be considered the type of investment that Warren Buffett might be interested in?
A lot of Buffett Coverage Doesn’t Equal A lot Of Buffett Knowledge
Before those reading write off the idea as an absurd view point that makes no sense, please here me out and think about the logic behind what I’m about to write. My first point would be that Warren Buffett is widely known and covered, but he is often very misunderstood. Commentators and pundits often spend a lot of time talking and pontificating about Buffett’s investing prowess, but there is often very little real understanding of how Warren Buffett has amassed such a fortune and been so consistently successful over the years. To be quite frank, much of the coverage of Warren Buffett amounts to complete nonsense. Much of the recent media attention surrounding Buffett has been in regard to his political views. Interesting perhaps, but worthless when it comes to understanding his investment methods and why they have yielded such great results. Then there are all of the soft ball interviews that Buffett does and all of the shallow reporting on how rich and smart “The Oracle” is. Still useless when it comes to any real understanding of Buffett’s market success. Of course there are reports on Buffett that are of more insight. Generally they get way less attention, but they are out there. For example I bet you didn’t know that everyone’s favorite investing genius just purchased a tungsten mine. Yep, its true, this article gives the details on how one of Berkshire Hathaway’s companies just invested $80 million in a large tungsten project.
Of course this is at the core of how Warren Buffett has amassed his multi-billion dollar fortune. He has made many investment’s that others either overlooked completely or that were considered too dull or plain to be worthy of investment. Coca-Cola and The Washington Post are just a couple of examples were Buffett identified the overlooked value in companies that were being shunned by most market participants. This is one reason that my claim about nickels being a Warren Buffett style investment is not necessarily crazy. Nickels are an unloved asset right now. In fact my reference to nickels as an asset will probably confuse some readers. Most people think of nickels as being annoying junk that isn’t useful for anything, besides cluttering up your living space or making annoying sounds jingling around in your pockets. There is more to the Nickel than one first might think, though....
Hidden Value In Nickels
The barely noticed nickel actually represents a potential opportunity for those who are attentive to the details surrounding this little coin. Most are probably not aware that not too long ago the Nickel was actually costing the U.S. Government mint more to make than the .5 cent face value of the coin. This is because melt value of the metals used to make Nickels have been in an uptrend for some time. Nickels are made out 75% copper and 25% nickel. Both of these metals have volatile prices, but overall they have gone up over the last decade, somewhat similar to gold and silver. At one point the melt value of Nickels was .7 cents. “So what!” you say, “that’s only a .2 cent difference!?” Well, if you just think about it, this means that $5,000 worth of nickels was actually worth $7,000, but due to the Government assigned face value, you could still go to your local bank and purchase them at face value. This is what I mean by hidden value. People who are aware have a chance to accumulate nickels at the .5 cent cost, even though the melt value has recently been more and likely will be again soon. A similar situation happened with pre-1965 U.S. silver coinage (dimes, quarters, & half dollars). When the melt value of the 90% silver used to make the coins, started approaching face value, people could have invested at bargain prices. Eventually the melt value of the 90% silver coins did exceed the face value and some people did seize the opportunity to hoard them away. Silver prices continued to be driven higher by inflationary policies like Lyndon B. Johnson’s Great Society program and war spending for the Vietnam conflict. Those who tucked the 90% Silver coins away, were rewarded handsomely. A $1,000 face value bag of the pre-1965 silver coins will sell for around $20,000 at today’s prices. This history lesson is an example of Gresham's Law in action. The simple economic law dictates that when bad money (usually paper money backed by nothing) enters circulation, good money will eventually be hoarded out of circulation. That's exactly what happened with the 90% silver coins and it is likely to happen to the nickel as well!
There Is Still Time To Make A Warren Buffett Style Investment, But It’s Running Out
The melt value of the nickel has retreated back below the .5 cent face value, but with the government still spending tons of money on foreign military adventures, endless expansion of welfare programs, and continued bail outs for the financial sector, metal values are likely to resume there uptrend at some point. This isn’t a get rich quick investment, it will likely take time for the Nickel to be hoarded out of circulation like the pre-1965 quarters and dimes were. Still, the potential upside is attractive and unlike allot of other investments the downside is basically non-existent. The only risk I see with putting money into Nickels right now is the opportunity cost of not owning some other high return investment. Even so the risk is very limited, even if markets go through a deflationary economic contraction before getting inflation, the purchasing power of your nickels will actually be increasing since the .5 cent nominal value will always be guaranteed. Stocks and most other investments will be getting hammered in this scenario, but not the nickel. This opportunity will not be around forever though, the new 2013 federal budget proposed by the Obama administration calls for the Secretary of the Treasury to have the authority to change the metal composition of our coinage in order to cut costs resulting from volatile metal prices.
The Buffett Connection
Though Warren Buffett is most certainly not allocating Berkshire Hathaway’s (his investment firm) money into nickels, I would still make the connection between investing in nickels and investing like Buffett. Warren Buffett, would not be were he is today if he was not very skilled at identifying opportunities were most people don’t see anything. As I already noted earlier in the article some of Buffett’s best investments, like Coca-Cola were unloved at the time. Well the nickel isn’t very loved either. It’s mostly just overlooked or considered a useless annoyance, but for those who look a little closer and analyze the potential, a profitable opportunity can be spotted! Another, even bigger reason that i’m making a connection to investing in nickels with Warren Buffett’s own investing strategy, would be the very, favorable risk-reward dynamics associated with nickels. After all, Warren Buffett is known for advocating investments, only in companies that have a “margin of safety”. Simply put, Buffett will not invest, unless he believes the price paid for the shares is at discount to the intrinsic value of the business. This is a key part of Buffett’s overall value based investment philosophy. He sums up this philosophy, himself, with his two most important rules to investing, were he says "The first rule of investing is don't lose money; the second rule is don't forget Rule No. 1."
The nickel fits in nicely with this little investing maxim, since as I explained earlier there is little to no downside in owning nickels, but the upside could be significant if we get any real inflationary pressures in the future.
More Important Information About Investing In Nickels
Another beneficial thing about investing your money in nickels at this point is the fact that there are no commissions, trading fees, or minimum buy ins. Literally anyone who has some source of income can begin accumulating nickels. Exchanging $2 for a roll of nickels every week with the cashier at a local business you frequent or at your bank could be feasible for most people. Others may want to invest more and that is possible as well. Hundreds or thousands of dollars in paper money can always be exchanged at the bank for nickels and still no fees or commissions like most other investments. Hedge fund manager Kyle Bass probably set the record for the largest nickel purchase ever when he purchased over $ 1 million worth, so there are definitely plenty of nickels to invest in. The only cost might be for a safe and secure storage option if you don’t already have one. Once you make your investment, you can track the daily fluctuations in the melt value at Coinflation’s coin value calculator page.
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Full Disclosure: I am not a registered investment adviser and this should not be considered a solicitation or offer to buy or sell any securities. This is my own opinion and anyone reading this should do their own research and form their own opinion. Any investment has potential risks and it is possible to lose money from investing in anything. Readers should consult a Registered Investment Adviser before making their investment decisions. And a Certified Public Accountant should be consulted regarding tax consequences. I could be considered a biased source because I am saving my nickels.