Warren Buffett Dislikes Bonds

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FBN2014
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Warren Buffett Dislikes Bonds

Post by FBN2014 » Sun Feb 25, 2018 10:57 am

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Re: Warren Buffet Dislikes Bonds

Post by Sandtrap » Sun Feb 25, 2018 1:24 pm

Lot's of threads on Buffett's attitude toward Bonds. Consider the source. What works for Buffett is not necessarily what works for someone in the late accumulation phase, or a senior that is 5 years into retirement.. . . or Jack Bogle.
viewtopic.php?t=217794
Last edited by Sandtrap on Sun Feb 25, 2018 1:41 pm, edited 1 time in total.

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Re: Warren Buffet Dislikes Bonds

Post by unclescrooge » Sun Feb 25, 2018 1:27 pm

Really nothing new.

Bonds lose value due to inflation over extended periods of time.

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Re: Warren Buffet Dislikes Bonds

Post by cfs » Sun Feb 25, 2018 1:39 pm

Thanks for the conversation. But this is nothing new. The Oracle of Omaha is NOT a member of The Bonds are for Safety Church, he told his investors about the danger of investing in bonds a couple of years ago, and I expect him to continue repeating the message until . . . [to be continued]. Muchas gracias por leer ~cfs~
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Re: Warren Buffet Dislikes Bonds

Post by jminv » Sun Feb 25, 2018 1:47 pm

Image

He does for groups that are supposed to have a long-term investing horizon. The graph above shows the real, cumulative long term returns for equities and bonds. As he mentioned, in the short-term horizon, equities are more risky than bonds but not in the long term, in his way of thinking about it.

“It is a terrible mistake for investors with long-term horizons—among them, pension funds, college endowments and savings-minded individuals—to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks,” he said. “Often, high-grade bonds in an investment portfolio increase its risk.”

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Re: Warren Buffet Dislikes Bonds

Post by cinghiale » Sun Feb 25, 2018 1:50 pm

At the risk of heaping it on...

Warren Buffett is a stock guy. His comments include an important qualifier: Bonds may not be a a good choice for a long term investor. Note:
“There is simply no telling how far stocks can fall in a short period,” Buffett said. “As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
And, s'il vous plaît, Buffett with two t’s.
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Re: Warren Buffet Dislikes Bonds

Post by scdevon » Sun Feb 25, 2018 1:51 pm

The DOW yields 2.53% (taxable) average at this stage of the game and it's unlikely that these 30 companies will ever fail to pay up.
I'm in my early 50s and I've never gone anywhere near bonds. I keep a 1 to 2 year emergency fund and let the rest ride 100% in stocks.

This system has never failed me since 1984. Bonds are a losing scenario in the long run compared to blue chip stock index funds.
Each their own.

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Re: Warren Buffet Dislikes Bonds

Post by lws6772 » Sun Feb 25, 2018 2:21 pm

I've always used cd's for my bond allocation, which is probably wrong according to traditional wisdom.
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Re: Warren Buffet Dislikes Bonds

Post by jalbert » Sun Feb 25, 2018 2:30 pm

The DOW yields 2.53% (taxable) average at this stage of the game and it's unlikely that these 30 companies will ever fail to pay up. 
Companies like GE?
Risk is not a guarantor of return.

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Re: Warren Buffet Dislikes Bonds

Post by jalbert » Sun Feb 25, 2018 2:34 pm

Buffett certainly recommends holding short-term treasuries. These are bonds, by the way.
Risk is not a guarantor of return.

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Re: Warren Buffet Dislikes Bonds

Post by nisiprius » Sun Feb 25, 2018 2:55 pm

scdevon wrote:
Sun Feb 25, 2018 1:51 pm
...Bonds are a losing scenario in the long run compared to blue chip stock index funds...
Just for the record, what do you use as your "blue chip stock index fund?" The DIA ETF? The Vanguard Mega Cap ETF? Fidelity Blue Chip Growth Fund? Something else?

And, what is your personal definition of a "blue chip?"

It should be remembered that the only reason we do not consider Enron to have been a "blue chip" today is because of the scandal and collapse..
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Enron: Could your stock be next?
It was the seventh largest firm on the Fortune 500... It only goes to show that even the bluest of blue chip stocks can be a ticking time bomb.
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Re: Warren Buffet Dislikes Bonds

Post by nedsaid » Sun Feb 25, 2018 4:23 pm

I want to point out that the insurance subsidiaries of Berkshire-Hathaway own billions of dollars worth of bonds. Not too much of an exaggeration to say that insurance companies are very large bond portfolios.
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Re: Warren Buffet Dislikes Bonds

Post by Pajamas » Sun Feb 25, 2018 4:34 pm

Warren Buffett is also a market timer and an active rather than passive investor. He likes to buy stocks when they are on sale and is currently sitting on over $100 billion in cash because he can't find anything that he thinks is a good enough deal. He is not exactly following the Bogleheads philosophy. Sometimes he doesn't even follow his own philosophy, like when he speculated on silver.

I have a lot of respect for the man, but sometimes people hang on every word he says rather than taking a step back and looking at everything he says and does and the context. Sometimes his statements can be contradictory and depend on the what and when and who.

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Re: Warren Buffet Dislikes Bonds

Post by drk » Sun Feb 25, 2018 4:40 pm

Pajamas wrote:
Sun Feb 25, 2018 4:34 pm
Warren Buffett is also a market timer and an active rather than passive investor. He likes to buy stocks companies when they are on sale and is currently sitting on over $100 billion in cash because he can't find anything that he thinks is a good enough deal. He is not exactly following the Bogleheads philosophy. Sometimes he doesn't even follow his own philosophy, like when he speculated on silver.

I have a lot of respect for the man, but sometimes people hang on every word he says rather than taking a step back and looking at everything he says and does and the context. Sometimes his statements can be contradictory and depend on the what and when and who.
One minor edit. Warren Buffett's advice and behavior are a non-sequitur to everyone on this forum.

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Re: Warren Buffet Dislikes Bonds

Post by petulant » Sun Feb 25, 2018 4:46 pm

jalbert wrote:
Sun Feb 25, 2018 2:34 pm
Buffett certainly recommends holding short-term treasuries. These are bonds, by the way.
Technically, bonds are only Treasury Securities with a duration greater than 10 years:

https://www.treasurydirect.gov/indiv/pr ... glance.htm

Bogleheads regularly discuss the problems with long-term bonds compared to short-term and intermediate fixed income. And, even then, many of us understand fixed income has a lower expected return than equity—it’s just less volatile in nominal terms.

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Re: Warren Buffet Dislikes Bonds

Post by Pajamas » Sun Feb 25, 2018 4:53 pm

drk wrote:
Sun Feb 25, 2018 4:40 pm

One minor edit. Warren Buffett's advice and behavior are a non-sequitur to everyone on this forum.
Berkshire Hathaway does hold billions of dollars' worth of shares of stock in other companies. I understand that he considers that as partial ownership of the company rather than investing in stocks, but that is what stock is, anyway.

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Re: Warren Buffet Dislikes Bonds

Post by jalbert » Sun Feb 25, 2018 4:59 pm

petulant wrote:
Sun Feb 25, 2018 4:46 pm
jalbert wrote:
Sun Feb 25, 2018 2:34 pm
Buffett certainly recommends holding short-term treasuries. These are bonds, by the way.
Technically, bonds are only Treasury Securities with a duration greater than 10 years:

https://www.treasurydirect.gov/indiv/pr ... glance.htm

Bogleheads regularly discuss the problems with long-term bonds compared to short-term and intermediate fixed income. And, even then, many of us understand fixed income has a lower expected return than equity—it’s just less volatile in nominal terms.
If you want to be nitpicky, "Treasury Notes" is the proper name for a class of things which is a subclass of a class of things whose common name is "bonds".
Risk is not a guarantor of return.

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Re: Warren Buffet Dislikes Bonds

Post by aristotelian » Sun Feb 25, 2018 5:03 pm

This is what Buffet actually says about bonds:

I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.


He says it is a terrible mistake to measure risk by ratio of stocks to bonds but does not say that he "dislikes" bonds nor that they are a terrible mistake in general.
Last edited by aristotelian on Sun Feb 25, 2018 5:16 pm, edited 1 time in total.

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Re: Warren Buffet Dislikes Bonds

Post by Toons » Sun Feb 25, 2018 5:08 pm

unclescrooge wrote:
Sun Feb 25, 2018 1:27 pm
Really nothing new.
Bonds lose value due to inflation over extended periods of time.
+1 :happy
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Re: Warren Buffet Dislikes Bonds

Post by drk » Sun Feb 25, 2018 5:14 pm

Pajamas wrote:
Sun Feb 25, 2018 4:53 pm
drk wrote:
Sun Feb 25, 2018 4:40 pm
One minor edit. Warren Buffett's advice and behavior are a non-sequitur to everyone on this forum.
Berkshire Hathaway does hold billions of dollars' worth of shares of stock in other companies. I understand that he considers that as partial ownership of the company rather than investing in stocks, but that is what stock is, anyway.
Obviously that's indisputable, but it seems like a distinction without a difference to me. Having the wherewithal to buy enough of nearly any S&P 500 to justify a board seat seems like a reasonable dividing line between "buying stocks" and "buying companies."

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Re: Warren Buffet Dislikes Bonds

Post by Artsdoctor » Sun Feb 25, 2018 5:40 pm

aristotelian wrote:
Sun Feb 25, 2018 5:03 pm
This is what Buffet actually says about bonds:

I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.


He says it is a terrible mistake to measure risk by ratio of stocks to bonds but does not say that he "dislikes" bonds nor that they are a terrible mistake in general.
You need to read the few paragraphs in his report BEFORE he writes this. He uses an example of meeting a pledge to the Girls Club of Omaha.

The issue with some of his reasoning, in general, is that he has unlimited resources--certainly far more than any of us. Even when it comes to the pledge that he details (he trades treasury STRIPs for BH shares half-way through his 10-year investment plan), he states that IF his change from bonds to stocks WERE to result in a short fall, that he would make up the difference from elsewhere. This is fine, but there are many investors who cannot "make it up elsewhere" if they miscalculate.

There's an equity smile which occurs in the course of investment life. Equity allocation is very high at the beginning of an investor's life and then gradually falls. If the investor becomes so wealthy that he/she cannot possibly spend the investment portfolio, the equity allocation can go back as far up as 100% because the portfolio is no longer just for the investor.

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Re: Warren Buffet Dislikes Bonds

Post by Pajamas » Sun Feb 25, 2018 5:54 pm

drk wrote:
Sun Feb 25, 2018 5:14 pm
Obviously that's indisputable, but it seems like a distinction without a difference to me.
Then why did you make the distinction in the first place? :oops:

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Re: Warren Buffet Dislikes Bonds

Post by drk » Sun Feb 25, 2018 5:54 pm

Pajamas wrote:
Sun Feb 25, 2018 5:54 pm
drk wrote:
Sun Feb 25, 2018 5:14 pm
Obviously that's indisputable, but it seems like a distinction without a difference to me.
Then why did you make the distinction in the first place? :oops:
To emphasize your point.

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Re: Warren Buffet Dislikes Bonds

Post by scdevon » Sun Feb 25, 2018 6:05 pm

jalbert wrote:
Sun Feb 25, 2018 2:30 pm
Companies like GE?
[/quote]

That's the beauty of a high quality, large cap diversified stock mutual fund. You can have a rotten egg in the basket sometimes and everything's still good.

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Re: Warren Buffett Dislikes Bonds

Post by NYCwriter » Sun Feb 25, 2018 6:23 pm

Doesn't Buffet own a lot of treasuries, though?

Iirc, he did say his ideal allocation was 90% SP500 and 10% Treasuries. I suppose it's doable if one has enough cash socked away in a MM.

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Re: Warren Buffett Dislikes Bonds

Post by jehovasfitness » Sun Feb 25, 2018 6:44 pm

I know most here dismiss Dave ramsey when it comes to investing but he appears to not like bonds either

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Re: Warren Buffet Dislikes Bonds

Post by Grt2bOutdoors » Sun Feb 25, 2018 7:02 pm

nedsaid wrote:
Sun Feb 25, 2018 4:23 pm
I want to point out that the insurance subsidiaries of Berkshire-Hathaway own billions of dollars worth of bonds. Not too much of an exaggeration to say that insurance companies are very large bond portfolios.
Insurance companies are regulated, requiring them to keep statutory reserves in the form of highly liquid investment grade assets - equities do not meet that requirement that easily permits them to meet their obligations in a timely manner. Those companies will need to hold a decent chunk in fixed income securities.

I agree with him that bonds over the long haul can lose to inflation but the average investor/saver has a limited amount of capital with which to meet their needs unlike Warren Buffet who has more than enough to last several generations of descendants and can therefore take the ultra long view and maximum equities risk. If his portfolio or rather his wife’s portfolio declines by 90% (complete loss to 90% allocation in equities), the remaining 10% in Treasuries will still be plenty sufficient for her remaining lifespan. Now those who agree with Warren ought to try that experiment with their own portfolio as a hypothetical realization of “what could be”, will they then be so bold as to say bonds are terrible investments? Unfortunately no way to know who is really walking the talk, not even Warren Buffet- if it were it would be fully transparent and it’s not, as he typically gets special permission from SEC not to disclose on a timely basis to avoid the front runners.
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Re: Warren Buffett Dislikes Bonds

Post by Grt2bOutdoors » Sun Feb 25, 2018 7:04 pm

jehovasfitness wrote:
Sun Feb 25, 2018 6:44 pm
I know most here dismiss Dave ramsey when it comes to investing but he appears to not like bonds either
Dave has most of his money tied up in his media empire and then real estate, has the lowest allocation in equities.
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Re: Warren Buffett Dislikes Bonds

Post by Grt2bOutdoors » Sun Feb 25, 2018 7:07 pm

NYCwriter wrote:
Sun Feb 25, 2018 6:23 pm
Doesn't Buffet own a lot of treasuries, though?

Iirc, he did say his ideal allocation was 90% SP500 and 10% Treasuries. I suppose it's doable if one has enough cash socked away in a MM.
The problem here is most people associate the underlying insurance companies as “Warren Buffet”, they are not as companies have a infinite lifespan, Warren’s is limited. His ideal allocation was that as recommended for his wife to follow upon his death.
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Re: Warren Buffett Dislikes Bonds

Post by jminv » Sun Feb 25, 2018 8:28 pm

Grt2bOutdoors wrote:
Sun Feb 25, 2018 7:07 pm
NYCwriter wrote:
Sun Feb 25, 2018 6:23 pm
Doesn't Buffet own a lot of treasuries, though?

Iirc, he did say his ideal allocation was 90% SP500 and 10% Treasuries. I suppose it's doable if one has enough cash socked away in a MM.
The problem here is most people associate the underlying insurance companies as “Warren Buffet”, they are not as companies have a infinite lifespan, Warren’s is limited. His ideal allocation was that as recommended for his wife to follow upon his death.
His recommended allocation to his wife upon his death is also a vote of limited confidence in whomever he has chosen as his successor. I picked up on that when he first mentioned it. Berkshire post-Buffett era will be interesting.

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Re: Warren Buffett Dislikes Bonds

Post by anoop » Sun Feb 25, 2018 9:26 pm

He obviously doesn't think the same of t-bills.

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Re: Warren Buffett Dislikes Bonds

Post by BlackHat » Sun Feb 25, 2018 9:54 pm

He has t-bills because he's to rich to hold normal cash. It's his cash equivalent. He's said numerous times hold enough cash to feel comfortable and invest the rest in the S&P 500.
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Re: Warren Buffett Dislikes Bonds

Post by Alexa9 » Sun Feb 25, 2018 10:02 pm

Don't invest in bonds! Put it all in BRK.A! Sounds legit.

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Re: Warren Buffett Dislikes Bonds

Post by munemaker » Sun Feb 25, 2018 10:29 pm

This has been widely reported in the past.

Nothing new here.

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Re: Warren Buffett Dislikes Bonds

Post by jvini » Mon Feb 26, 2018 9:30 am

I learned to own bonds the hard way, but I was so stubborn I made up for the losses and then applied the lesson of owning bonds. Sometimes tenacity wins over emotion.

For about 15 years I owned no bonds. I looked at the statistics and questioned why I would own something that didn't perform as well as equities in the long term. I was robotic in my dollar cost averaging and rebalanced between international and U.S.equities. Then came 2008, when I saw my portfolio get cut in half.

I didn't sell, but kept dollar cost averaging the best I could. Slowly I got back to my pre crash balance and my pre crash all equity allocation. And then I sold a lot of those equities from my roll over IRAs and bought a total bond fund using age -13 as a rough guide. If my aa went to bonds at age -20, I kept my aa, then rebalanced at the end of the year. When it got too far out of whack, I rebalance into bonds.

Now I have a sizeable portfolio, and continue to do this. If stocks plummet, I'll rebalance out of bonds into equities.

If I get to a point of having a large enough portfolio, with enough cushion in bonds that a 50% drop in equities won't matter, I'll probably start allocating more to equities for future generations. If I retire early, that may not happen, which is ok.

I also know that my Vanguard total bond fund may fall a % or 2 in the short run of 5 years or so, but as rates go up, it will ultimately likely benefit me in retirement which is 5-10 years away.

Would I get better returns owning all equities? Probably, but im not taking the chance. It would be leaving too much to timing. I don't want to retire and have equities get cut in half again, with no new money coming in. I prefer to enjoy retirement and sleep at night.

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Re: Warren Buffett Dislikes Bonds

Post by Stormbringer » Mon Feb 26, 2018 10:14 am

anoop wrote:
Sun Feb 25, 2018 9:26 pm
He obviously doesn't think the same of t-bills.
Buffett has made it clear that he doesn't like sitting on so many T-bills either. He would rather use the money and make acquisitions with it, but he hasn't found the right business at the right price for a while.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Warren Buffett Dislikes Bonds

Post by visualguy » Mon Feb 26, 2018 10:37 am

I dislike bonds too... Having a large amount of money in an asset that isn't even likely to keep up with inflation post tax is very hard to swallow.

I don't want to put everything in stocks because of the risk of a very long bear market or multiple successive bear markets with short-lived recoveries or some other prolonged bad scenario.

From my perspective, the solution is to diversify to direct real-estate by owning rental properties. I still have fixed income, but much less than if everything was in my stock/bond portfolio. This reduces my exposure to stock market risk as well.

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Re: Warren Buffett Dislikes Bonds

Post by CFM300 » Mon Feb 26, 2018 10:45 am

Big talk for a guy whose company is sitting on $100 billion in cash. :D

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Re: Warren Buffet Dislikes Bonds

Post by cantos » Mon Feb 26, 2018 1:00 pm

Warren Buffet:
“There is simply no telling how far stocks can fall in a short period,” Buffett said. “As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
See highlighted section in bold. That's a big assumption. If you can do that, then, sure, bonds are more risky. Since none of us average people can do that, though, bonds are less risky.

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Re: Warren Buffett Dislikes Bonds

Post by bgf » Mon Feb 26, 2018 2:32 pm

of course he does. his sole purpose at berkshire is to allocate capital for high returns...
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Re: Warren Buffett Dislikes Bonds

Post by Theoretical » Mon Feb 26, 2018 9:50 pm

CFM300 wrote:
Mon Feb 26, 2018 10:45 am
Big talk for a guy whose company is sitting on $100 billion in cash. :D
Cash is a different asset class altogether from bonds. It may be a debt security but it behaves a lot differently than even an intermediate term bond. Especially if you add the credit exposure of money market funds to it, there's nil interest rate exposure and it won't be correlated to anything.

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Re: Warren Buffett Dislikes Bonds

Post by goodenyou » Mon Feb 26, 2018 10:02 pm

Theoretical wrote:
Mon Feb 26, 2018 9:50 pm
CFM300 wrote:
Mon Feb 26, 2018 10:45 am
Big talk for a guy whose company is sitting on $100 billion in cash. :D
Cash is a different asset class altogether from bonds. It may be a debt security but it behaves a lot differently than even an intermediate term bond. Especially if you add the credit exposure of money market funds to it, there's nil interest rate exposure and it won't be correlated to anything.
I thought Buffet said "Cash is trash!". Now I'm really confused :oops:
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Re: Warren Buffett Dislikes Bonds

Post by joe8d » Mon Feb 26, 2018 10:19 pm

FBN2014 wrote:
Sun Feb 25, 2018 10:57 am
Buffett says 'terrible mistake' for long-term investors to be in bonds

[link formatted by admin LadyGeek]
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All the Best, | Joe

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Re: Warren Buffett Dislikes Bonds

Post by grok87 » Tue Feb 27, 2018 10:27 am

“Don’t ask the barber if you need a haircut.”

Translation: don’t listen to the head of a publicly listed company (ie a stock) when he tells you to buy stocks not bonds...
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Warren Buffett Dislikes Bonds

Post by Calygos » Tue Feb 27, 2018 10:31 am

grok87 wrote:
Tue Feb 27, 2018 10:27 am
“Don’t ask the barber if you need a haircut.”

Translation: don’t listen to the head of a publicly listed company (ie a stock) when he tells you to buy stocks not bonds...
On the other hand, don't ignore an argument just because the person may have a bias. Evaluate the argument on its merits. Having a bias doesn't necessarily mean the person is wrong.

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Re: Warren Buffett Dislikes Bonds

Post by Boglegrappler » Tue Feb 27, 2018 12:53 pm

“Don’t ask the barber if you need a haircut.”
Translation: don’t listen to the head of a publicly listed company (ie a stock) when he tells you to buy stocks not bonds...
These discussions about Buffett usually make me cringe, and they usually confirm why most Bogleheads should be Bogleheads. :)

Its worthwhile making the point that Buffett is not trying to snooker you into buying stock from him, or issued by Berkshire (or anyone else). Berkshire hasn't sold a share of stock to the public since Buffett took control, as far as I am aware. In fact, he'd like for BRK to go down in value so he could buy out the public holders at lower prices. He doesn't look to use the stock as an acquisition currency either, and in his past letters he has some examples of having done so once or twice and regretted it in hindsight.

The whole discussion of risk hinges on his definition of investment, which is giving up your purchasing power today in exchange for having more purchasing power in the future. He makes a big deal out of the likelihood that, over time, the purchasing power of any given currency is like to erode steadily and materially, for various reasons. I recommend re-reading pages 17-19 of his 2011 letter, and focus on this paragraph.
Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.
IMO, there is a forecast in this observation about how our fiscal issues are likely to be solved, and the implicit prediction is that dollars received far in the future won't buy close to what dollars buy today (assuming that we are still using dollars at all, and not some new replacement currency arising from some debt restructuring). In any case, he's made it pretty clear to not risk too great a percentage of your assets in bonds (currency denominated investments).

All that said, I agree that if you're 70 or 80, and your assets are marginally adequate, you might eschew his advice. If you're on the younger side of 50 though, I'd pay close attention.

longinvest
Posts: 2881
Joined: Sat Aug 11, 2012 8:44 am

Re: Warren Buffett Dislikes Bonds

Post by longinvest » Tue Feb 27, 2018 3:27 pm

I've asked a similar question on another thread, but I'm still waiting for answers.

Let's say that I'm 40 and I plan to buy a Toyota Camry (MRSP $23,500 according to toyota.com/camry/)) at age 70, 30 years from now. I'd like to know how much money should I invest, today, in Vanguard's S&P 500 fund (VFINX), with dividend reinvested, so that I get an inflation-adjusted $23,500 in 30 years from now.

Warren Buffett says that stocks are less risky than bonds in the long term. A period of 30 years seems pretty long-term to me; my entire lifespan should be less than 4 times that. Looking back 30 years, it was 1988. Yes, that's a long term ago!

According to FRED (https://fred.stlouisfed.org/series/DFII30), the current yield on 30-year TIPS is 1.03% real. In other words, if I put $17,280 into a zero-coupon TIPS, today, I would be guaranteed to receive back an inflation-adjusted $23,500 in 30 years:
  • $17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)
If stocks are really less risky than bonds in the long term, I should consequently be able to invest less than $17,280 in VFINX, today, with dividends reinvested, and get an inflation-adjusted $23,500 in 30 years from now.

My question: How much less than $17,280 should I invest in stocks (VFINX) today in a tax-free account (like a Roth-IRA) to get an inflation-adjusted $23,500 in 30 years?

Notes
Investing more than $17,280 into VFINX is not an option, as it would lead to a contradiction, indicating that bonds are less risky than stocks.
A TIPS is a type of Treasury bond, but it has its coupons and principal indexed to inflation.
A zero-coupon TIPS is a TIPS which has no coupons and only pay its (inflation-adjusted) face value at maturity.
Last edited by longinvest on Tue Feb 27, 2018 3:32 pm, edited 1 time in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

inbox788
Posts: 5154
Joined: Thu Mar 15, 2012 5:24 pm

Re: Warren Buffett Dislikes Bonds

Post by inbox788 » Tue Feb 27, 2018 3:32 pm

jminv wrote:
Sun Feb 25, 2018 8:28 pm
His recommended allocation to his wife upon his death is also a vote of limited confidence in whomever he has chosen as his successor. I picked up on that when he first mentioned it. Berkshire post-Buffett era will be interesting.
I think you're reading too much of this, and I'm reading too much of this, but I think WB is a BH. He thinks his wife can tolerate a 90/10 AA, which he is correct, since most of the investments not likely to be used by his wife, but the kids and grandkids and future generations, and are invested as such.

Berkshire Hathaway has figured out a way to to not only tax-defer all the dividends of the public companies, but also all future dividends of the companies it buys out completely (http://fortune.com/2015/03/26/buffett-h ... for-kraft/ ). In a way, he's converting dividend paying stocks into a growth stock! And he's repurposed all this free cash, "new form of float". Benefiting from this has caused a different problem, which is selling the holdings would trigger high tax costs. While BH can't rebalance out of these "suboptimal investments" easily, his wife might get a step up basis, which is the the perfect opportunity to rebalance into a properly diversified AA BH style! I think WB has plenty of confidence in BRK as much as SP500, but he's saying why take individual stock risk when there's a free lunch in diversification? Very BH IMO.
Last but not least there is the issue of the deferred taxes. This is basically a new form of float that Warren has founded which is growing rapidly. Due to the new tax regulation a significant portion of it was transferred into equity. Deferred taxes still amounted to $56.6B and is almost certain to grow again in the future due to investments by operating businesses and additional unrealized gains. While Berkshire can keep the assets, defer taxes and earn additional income these unpaid taxes limit the flexibility in which Berkshire Hathaway can deploy their capital. Selling shares in Coca Cola (KO) for example would trigger huge tax costs which means that Berkshire has to stay invested in suboptimal investments. Therefore I deduct 25% of all deferred taxes from the net asset value which amounts to $14.2B.
https://seekingalpha.com/article/415107 ... e-hathaway

BTW, Warren Buffett is credited with saying “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”. The BH equivalent is rebalance! You'll notice they coincidence quite nicely.

grok87
Posts: 7998
Joined: Tue Feb 27, 2007 9:00 pm

Re: Warren Buffett Dislikes Bonds

Post by grok87 » Tue Feb 27, 2018 3:54 pm

longinvest wrote:
Tue Feb 27, 2018 3:27 pm
I've asked a similar question on another thread, but I'm still waiting for answers.

Let's say that I'm 40 and I plan to buy a Toyota Camry (MRSP $23,500 according to toyota.com/camry/)) at age 70, 30 years from now. I'd like to know how much money should I invest, today, in Vanguard's S&P 500 fund (VFINX), with dividend reinvested, so that I get an inflation-adjusted $23,500 in 30 years from now.

Warren Buffett says that stocks are less risky than bonds in the long term. A period of 30 years seems pretty long-term to me; my entire lifespan should be less than 4 times that. Looking back 30 years, it was 1988. Yes, that's a long term ago!

According to FRED (https://fred.stlouisfed.org/series/DFII30), the current yield on 30-year TIPS is 1.03% real. In other words, if I put $17,280 into a zero-coupon TIPS, today, I would be guaranteed to receive back an inflation-adjusted $23,500 in 30 years:
  • $17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)
If stocks are really less risky than bonds in the long term, I should consequently be able to invest less than $17,280 in VFINX, today, with dividends reinvested, and get an inflation-adjusted $23,500 in 30 years from now.

My question: How much less than $17,280 should I invest in stocks (VFINX) today in a tax-free account (like a Roth-IRA) to get an inflation-adjusted $23,500 in 30 years?

Notes
Investing more than $17,280 into VFINX is not an option, as it would lead to a contradiction, indicating that bonds are less risky than stocks.
A TIPS is a type of Treasury bond, but it has its coupons and principal indexed to inflation.
A zero-coupon TIPS is a TIPS which has no coupons and only pay its (inflation-adjusted) face value at maturity.
There are no guarantees with equities. You pays your money and you takes your chances.

So you need to invest more than $17,820 to guArantee you can buy the car in 30 years. A lot more.

Take the example of Japan. In December 1989 the Nikkei was trading at 38,916. Today, call it 30 years later, it is trading at 22,389 or 42.5% lower. Now that excludes dividends of course. Let’s assume, because i’m Lazy that dividends would have kept you up with inflation.

So to “guarantee” having a real $23,500 in 30 years you would need to start with $40,847.

And even then you wouldn’t be sure-sure. Things can happen in the future that are more extreme than anything that has happened in the past.

Taleb makes this point in his books. He says that people who use recent worst case events as a guide to future risk are ignoring the fact that before that event happened the previous worst case would have been less extreme and hence an unreliable guide to the events that were about to unfold..

Cheers,
Grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

TomCat96
Posts: 467
Joined: Sun Oct 18, 2015 12:18 pm

Re: Warren Buffett Dislikes Bonds

Post by TomCat96 » Tue Feb 27, 2018 5:16 pm

grok87 wrote:
Tue Feb 27, 2018 3:54 pm
longinvest wrote:
Tue Feb 27, 2018 3:27 pm
I've asked a similar question on another thread, but I'm still waiting for answers.

Let's say that I'm 40 and I plan to buy a Toyota Camry (MRSP $23,500 according to toyota.com/camry/)) at age 70, 30 years from now. I'd like to know how much money should I invest, today, in Vanguard's S&P 500 fund (VFINX), with dividend reinvested, so that I get an inflation-adjusted $23,500 in 30 years from now.

Warren Buffett says that stocks are less risky than bonds in the long term. A period of 30 years seems pretty long-term to me; my entire lifespan should be less than 4 times that. Looking back 30 years, it was 1988. Yes, that's a long term ago!

According to FRED (https://fred.stlouisfed.org/series/DFII30), the current yield on 30-year TIPS is 1.03% real. In other words, if I put $17,280 into a zero-coupon TIPS, today, I would be guaranteed to receive back an inflation-adjusted $23,500 in 30 years:
  • $17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)
If stocks are really less risky than bonds in the long term, I should consequently be able to invest less than $17,280 in VFINX, today, with dividends reinvested, and get an inflation-adjusted $23,500 in 30 years from now.

My question: How much less than $17,280 should I invest in stocks (VFINX) today in a tax-free account (like a Roth-IRA) to get an inflation-adjusted $23,500 in 30 years?

Notes
Investing more than $17,280 into VFINX is not an option, as it would lead to a contradiction, indicating that bonds are less risky than stocks.
A TIPS is a type of Treasury bond, but it has its coupons and principal indexed to inflation.
A zero-coupon TIPS is a TIPS which has no coupons and only pay its (inflation-adjusted) face value at maturity.
There are no guarantees with equities. You pays your money and you takes your chances.

So you need to invest more than $17,820 to guArantee you can buy the car in 30 years. A lot more.

Take the example of Japan. In December 1989 the Nikkei was trading at 38,916. Today, call it 30 years later, it is trading at 22,389 or 42.5% lower. Now that excludes dividends of course. Let’s assume, because i’m Lazy that dividends would have kept you up with inflation.

So to “guarantee” having a real $23,500 in 30 years you would need to start with $40,847.

And even then you wouldn’t be sure-sure. Things can happen in the future that are more extreme than anything that has happened in the past.

Taleb makes this point in his books. He says that people who use recent worst case events as a guide to future risk are ignoring the fact that before that event happened the previous worst case would have been less extreme and hence an unreliable guide to the events that were about to unfold..

Cheers,
Grok
I believe the point that longinvest was implicitly trying to make was a scientific one. In colloquial discussions, we often decide if something is true or not. People argue and debate around the point.

In science and mathematics, we use different tools for truth. Once we establish something is true, we build off it. We continue growing our knowledge based on the edifice of the truth we establish. If the truth is actually truth, the growth will be functional, organic, and something we can continue to build off of. If the truth is actually erroneous, then as we build off that truth, we will find things that don't make any sense.

I think the way you construe of a guarantee is that of a colloquialism. There are no guarantees in life. Therefore, to you, I posit you feel longinvest's question either makes no sense, or is not worthwhile broaching.

I tend to use longinvest's methodology in my personal life. It doesn't win me any friends at parties, but it is a powerful tool to discern things I accept and don't accept.

In fact, longinvest's question wasn't just on whether stocks have a better return than TIPs, but exactly how much better.

From the get go, you ask yourself, I believe that A is true. But at what point is A no longer true? It takes out all of the emotional baggage and heels in the sand stubbornness that people's emotions are prone by forcing them to figure out at the outset, "at exactly what point am I wrong?"

In my opinion, and given
$17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)

a diversified stock portfolio should return approximately 4% a year real. (obviously this is debatable)

23,500 / 1.04^30 = $7245

17280 - 7245 = $10035

I should be able to invest a whopping 10,035 dollars less towards the tips investment and achieve the exact same result.

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