Buffet says no to bonds - recommends equities and cash

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Re: Buffett on bonds

Postby stevewolfe » Sat May 18, 2013 11:50 am

Strevlac wrote:There has been a lot of talk about an inevitable increase in interest rates, but much less talk about our governments ability to pay higher rates on our national debt. What is it now, 13 trillion and rising? That's what has me thinking rates are going to be very, very low for the forseeable future. Of course I could have this all wrong but I haven't really seen anyone explain why that wouldn't be the case.


Agreed. Buy EE savings bonds. (BTW, $16 trillion and rising)
User avatar
stevewolfe
 
Posts: 1328
Joined: Fri Oct 10, 2008 7:07 pm

Re: Buffett on bonds

Postby gerrym51 » Sat May 18, 2013 11:57 am

1. Buffetts a gazilionaire. he does not worry about finances. i bet he still keeps some bonds.
2. this thing about interest rates rising. the government ,the federal reserve, the treasury and been trying to stimulate the economy. they have been pumping gazillions. they still have to borrow money to pay off the debt which increases their own borrowing costs. do you honestly believe they are suddenly going to increase rate to 3 percent and put the economy into a downer again just to appease return seekers.NO.

it's going to be a very gradual increase. i would not be suprised to see only a 1/4 to 1/2 percent a year. i forsee at least 10 years to get it to 3 percent. there will be more hysteria about interest rates rising. the hysteria will be worse than the actual increase.


SHEESH :oops:
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Buffett on bonds

Postby Scooter57 » Sat May 18, 2013 12:36 pm

Gerrym51,

I take it your astrologer's prediction is the basis of your certainty about how interest rates will rise, since no one else, including the Fed governors themselves have this information.

The issue that Buffett and everyone else is pointing to is that the problem with bonds is structural. Unlike markets which go up and down randomly, bond prices follow strict rules. The probability that interest rates will rise is very high. What happens when they start to rise is unknown, but it's safe to say that the people who are in bonds now because they are telling themselves "I will get out when rates start to rise" will dump their bonds when they do. And when that happens it's anyone's guess what happens. It will affect the liquidity of bonds and it will have a strong affect on the prices of Bond Funds which have to sell bonds to pay for redemptions.

There's no rule that says that bond prices have to adhere to the duration rule. Prices respond to demand. If the demand for bonds drops, then the funds will have to sell their bonds at whatever they can get, which might be less than the current NAV suggests--resulting in dramatic drops in NAV.

Perhaps very slow changes in interest rates will slow this process, but they won't stop it, and as long as rates keep dropping your fund NAV will be below current levels. New bonds will replace old ones, more slowly than has been the case over the past 30 years when bonds got called a lot, since companies don't call bonds when rates are rising. But if rates continue to rise, their prices continue to drop, too. Best case you have locked in today's rotten yields for the length of the current duration (unlikely) Worst case you've locked them in for a decade or more--during which time you have to pray that inflation stays at whatever your bond fund is yielding this week.

There really is a reason all these experts are warning people that bonds are not the safe haven they have been for the past 30 years.
Scooter57
 
Posts: 715
Joined: Thu Jan 24, 2013 9:20 am

Re: Buffett on bonds

Postby gerrym51 » Sat May 18, 2013 12:44 pm

Scooter57 wrote:Gerrym51,

I take it your astrologer's prediction is the basis of your certainty about how interest rates will rise, since no one else, including the Fed governors themselves have this information.

The issue that Buffett and everyone else is pointing to is that the problem with bonds is structural. Unlike markets which go up and down randomly, bond prices follow strict rules. The probability that interest rates will rise is very high. What happens when they start to rise is unknown, but it's safe to say that the people who are in bonds now because they are telling themselves "I will get out when rates start to rise" will dump their bonds when they do. And when that happens it's anyone's guess what happens. It will affect the liquidity of bonds and it will have a strong affect on the prices of Bond Funds which have to sell bonds to pay for redemptions.

There's no rule that says that bond prices have to adhere to the duration rule. Prices respond to demand. If the demand for bonds drops, then the funds will have to sell their bonds at whatever they can get, which might be less than the current NAV suggests--resulting in dramatic drops in NAV.

Perhaps very slow changes in interest rates will slow this process, but they won't stop it, and as long as rates keep dropping your fund NAV will be below current levels. New bonds will replace old ones, more slowly than has been the case over the past 30 years when bonds got called a lot, since companies don't call bonds when rates are rising. But if rates continue to rise, their prices continue to drop, too. Best case you have locked in today's rotten yields for the length of the current duration (unlikely) Worst case you've locked them in for a decade or more--during which time you have to pray that inflation stays at whatever your bond fund is yielding this week.

There really is a reason all these experts are warning people that bonds are not the safe haven they have been for the past 30 years.



YES.

now that i've said that i also said i was diversified. that is why they say diversify. my prediction is as good as anybody else's.(it's also as bad as anyone else.r we don't know. since you and i have had dueling e-mails for the past several weeks we both have our ideas. if i new for sure whats going to happen i'd have it all in whatever it is.

can you tell me what is going to happen for sure. the way i see it on gnma as opposed to direct treasuries if interests rates start to go up-mortgages also go up. refinancing s to lower rates go down. that is why i have no direct investments in bond fund of treasuries.(although i do have target date funds that do)

ps -i'm beginning to think you lie in wait for my posts so you can tear them to shreds :mrgreen:

another thing while i'm at it. what credit union in mass gave you the 2 percent cd's
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Buffett on bonds

Postby Frank2012 » Sat May 18, 2013 1:02 pm

Yes, it is obvious to everyone for a decade plus that interest rates will rise and cream bond funds. What would help immensely, however, is if we knew exactly when rates would rise so we could time the market and make a bundle. Since I'm not good at guessing, I'm content to follow my asset allocation, rebalance every so often, and not try to time the bond market, stock market or interest rates.
Frank2012
 
Posts: 35
Joined: Fri Jan 25, 2013 7:16 pm

Re: Buffett on bonds

Postby danwhite77 » Sat May 18, 2013 1:05 pm

Buffett's one-liner on bonds is usually something along the lines of:

When you factor in inflation, instead of risk-free return, bonds are usually return-free risk.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
User avatar
danwhite77
 
Posts: 317
Joined: Thu Mar 08, 2012 9:21 am

Re: Buffett on bonds

Postby Calm Man » Sat May 18, 2013 1:13 pm

I am frankly delighted he said all of this and it makes me more comfortable holding my IPS in bonds. First the guy's insurance companies hold plenty of bonds so he's not exactly telling the whole truth. Second, anything he says has to be viewed in that he is a CEO of a company so cannot say anything not compatible with the company message. But more important, if he and his ilk really have a whole bunch of $ sitting in cash instead of bonds, that leaves a whole bunch of money that could be invested in bonds in the future. It is not like this gentleman can predict the future of interest rates any better than anybody else, including any of us.
Calm Man
 
Posts: 2907
Joined: Wed Sep 19, 2012 9:35 am

Re: Buffett on bonds

Postby Calm Man » Sat May 18, 2013 1:16 pm

stemikger wrote:
dbr wrote:It's going to be very interesting to see the conversation when the stock market has its next downtrend.


Very true. That is when Staying the Course will surely be tested.


Indeed. At that point we will all applaud ourselves for sticking to our IPS plan for bonds as we always knew that bonds were more for safety than return. Now, those who question this are riding an incredible rise in the stock market. I too am experiencing it but am 60 and have seen these things go up and come all the way back down. So I would ignore all noise, including anything said by Buffet or anybody else, and stick to the IPS.
Calm Man
 
Posts: 2907
Joined: Wed Sep 19, 2012 9:35 am

Re: Buffet says no to bonds - recommends equities and cash

Postby LadyGeek » Sat May 18, 2013 1:34 pm

FYI - I merged this thread into an older thread, which discusses the same topic and has the same Yahoo Finance link: Buffett: Bonds Are 'Terrible Investment' Now (from May 6).
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 20628
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia

Re: Buffet says no to bonds - recommends equities and cash

Postby rmelvey » Sat May 18, 2013 1:39 pm

Has Buffet ever publicly recommended bonds?
User avatar
rmelvey
 
Posts: 407
Joined: Sat Sep 18, 2010 5:17 pm

Re: Buffett on bonds

Postby Clive » Sat May 18, 2013 2:29 pm

Scooter57 wrote:What happens when they start to rise is unknown

Same as usual. High inflation, high yields, modest taxation of nominal 'gains' .... sustained for a number of years and bond holders in net real terms lose -50% to -80%.

1960 - 1981 UK, basic tax rate gilt (treasury) bond holders lost -80% in real terms.

Yet the Debt Management Office proudly proclaim "The Government has never failed to make interest or principal payments on gilts as they fall due".
Clive
 
Posts: 1193
Joined: Sat Jun 13, 2009 5:49 am

Re: Buffet says no to bonds - recommends equities and cash

Postby LadyGeek » Sat May 18, 2013 2:58 pm

Scooter57 wrote:Gerrym51,

...I'm reading the same new posts as you are, and since I know that people posting aren't reading all or even in many cases any of the previous posts, I'm making points people need to understand to invest safely.

There are some exceptions. :wink: It's most helpful when everyone can focus on the same topic, i.e. Buffet and bonds.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 20628
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia

Re: Buffet says no to bonds - recommends equities and cash

Postby LadyGeek » Sat May 18, 2013 3:27 pm

^^^ Update: I removed a few off-topic posts which were discussing CDs.

Please stay on-topic.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 20628
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia

Re: Buffet says no to bonds - recommends equities and cash

Postby gerrym51 » Sat May 18, 2013 3:35 pm

LadyGeek wrote:^^^ Update: I removed a few off-topic posts which were discussing CDs.

Please stay on-topic.


ok
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Buffet says no to bonds - recommends equities and cash

Postby Qtman » Sat May 18, 2013 3:42 pm

Would that we were all as smart as Mr. Buffett. I hold many individual bonds and will continue to, Dr. Zvi Bodie might have another outlook.
Don’t wear yourself out trying to get rich; be wise enough to control yourself. | Wealth can vanish in the wink of an eye. It can seem to grow wings and fly away | like an eagle. - King Solomon
User avatar
Qtman
 
Posts: 337
Joined: Sun Jun 29, 2008 8:00 pm
Location: Rocky Mountains

Re: Buffett on bonds

Postby z3r0c00l » Sat May 18, 2013 6:08 pm

stemikger wrote:I think it's a safe bet that interest rates will not stay this low for much longer. It's hard to disagree with the greatest investor in the world.


Check out '96 to 2012:

http://www.tradingeconomics.com/japan/interest-rate

For the investing needs of normal people, there is no best. He is great at buying large portions of companies. I still don't see how that translates to advice for us. Buffet never has to worry about things like emergency funds and reducing volatility to ensure a safe retirement. It seems to me that much of his job is picking stocks that are undervalued and buying them. Should we do the same?
z3r0c00l
 
Posts: 629
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC

Re: Buffet says no to bonds - recommends equities and cash

Postby jupiter_man » Sat May 18, 2013 7:02 pm

Due to the recent rise in stocks , my bond % was getting lower that my target allocation, i see this as a good opportunity to buy Bonds to keep up my target allocation. So for this months investment allocation I placed a order to buy V Limited Term Tax Exempt in my Taxable Account.

We will see what happens 5 years down the road :happy
User avatar
jupiter_man
 
Posts: 60
Joined: Fri May 03, 2013 8:02 pm

Re: Buffett on bonds

Postby WolfpackFan » Fri May 24, 2013 10:38 pm

danwhite77 wrote:Buffett's one-liner on bonds is usually something along the lines of:

When you factor in inflation, instead of risk-free return, bonds are usually return-free risk.


lol that's funny. and sad too :(
User avatar
WolfpackFan
 
Posts: 252
Joined: Mon Mar 08, 2010 2:18 pm

Re: Buffet says no to bonds - recommends equities and cash

Postby sdelear » Sat May 25, 2013 1:54 am

What rate did Berkshire get on the bonds it holds? If it needs to hold bonds for regulatory purposes, and those bonds are paying 5-7+%, then I expect brk will hold on to them.

Just remember, the historical average for inflation is 3.5%. This argues strongly for long term bonds being a bad investment at current rates.
sdelear
 
Posts: 5
Joined: Wed May 22, 2013 1:35 pm

Re: Buffet says no to bonds - recommends equities and cash

Postby William Million » Sat May 25, 2013 9:17 am

sdelear wrote:What rate did Berkshire get on the bonds it holds? If it needs to hold bonds for regulatory purposes, and those bonds are paying 5-7+%, then I expect brk will hold on to them.

Just remember, the historical average for inflation is 3.5%. This argues strongly for long term bonds being a bad investment at current rates.


A bad investment in real terms. But for someone like me nearing retirement, I really have no responsible option but to hold about 50% fixed income. Can't just shift to 100% stocks and sustain a 2/3 drop. The question is, and the one I raised in the original post, what are the best fixed income options right now?
User avatar
William Million
 
Posts: 332
Joined: Wed May 05, 2010 4:41 am
Location: A Deep Mountain

Re: Buffet says no to bonds - recommends equities and cash

Postby Kevin M » Sat May 25, 2013 6:42 pm

William Million wrote:A bad investment in real terms. But for someone like me nearing retirement, I really have no responsible option but to hold about 50% fixed income. Can't just shift to 100% stocks and sustain a 2/3 drop. The question is, and the one I raised in the original post, what are the best fixed income options right now?

Apparently posts on CDs are considered off-topic in this thread, even though you mentioned CDs in your OP. So I guess I can't tell you my answer to your question here. You could start a new thread and just ask this question directly, but there are already plenty of posts discussing this topic.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)
User avatar
Kevin M
 
Posts: 4489
Joined: Mon Jun 29, 2009 3:24 pm

Previous

Return to Investing - Theory, News & General

Who is online

Users browsing this forum: clacy, duffer, Dutch, FAST Enterprise [Crawler], Google [Bot], jmg229, protagonist, spankasmurf and 59 guests