Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

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rjb112
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Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by rjb112 » Fri May 18, 2018 10:21 pm

During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by AlohaJoe » Fri May 18, 2018 10:23 pm

Why do you listen to Buffet about bonds but ignore him about equities? Does he tell you to invest in things besides stocks? No, he doesn't.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by PhilosophyAndrew » Fri May 18, 2018 10:34 pm

OP, why should Boglebeads deem this important?

Perhaps there is a substantive Buffet-inspired critique of o one or more of the tenets of Boglehead investing, but simply summarizing one of Buffet’s opinions does not present such a critique.

Andy.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by permport » Fri May 18, 2018 10:45 pm

Cash / short term fixed income.

It's not really that bonds are bad, it's more that he doesn't like the risk/return characteristics of the intermediate and longer term issues.

Just shorten the duration of the bond portion of your portfolio if you are really concerned, but abandoning fixed income entirely isn't probably something we should do. Berkshire itself keeps billions in short term treasuries.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by zmaqoptyxbglp » Fri May 18, 2018 11:29 pm

permport wrote:
Fri May 18, 2018 10:45 pm
Cash / short term fixed income.

It's not really that bonds are bad, it's more that he doesn't like the risk/return characteristics of the intermediate and longer term issues.

Just shorten the duration of the bond portion of your portfolio if you are really concerned, but abandoning fixed income entirely isn't probably something we should do. Berkshire itself keeps billions in short term treasuries.
Berkshire keeps such a large amount of short term treasuries as a parking place for capital, due to not having found what Buffett and Munger deem worthwhile investments - a deed which has obviously been getting harder and harder with the growing PEs, Berkshire's larger market cap and what I would consider higher levels of market efficiency (as noted by increased inability of active funds to beat the market). He is extremely unhappy about this fact and keeps saying that he'll only be happy when he has found investments worthwhile enough to invest in, and has deployed most of his capital in productive assets.

I think that is a very crucial distinction to be made - bonds are not really an investment for him, it is not a part of his desired portfolio as it might be for you or tons of folks on this forum than voluntarily choose to have a certain portion of their portfolio in fixed assets. His recommended portfolio for his widow was 90% Vanguard 500 and 10% treasuries. He keeps recommending that people buy the Vanguard 500 consistently over a long run, not that they build a balanced portfolio of stocks and bonds. Sorry Ben, Warren doesn't listen to you anymore.

US Stocks right now have a forward earnings yield of around 6%. Add in around 2% in earnings growth (tagged to real GDP growth) and that is almost an 8% real return. That's not really that bad. How consistent the current earnings yield would be in the future, I do not know. People like Shiller like to insist that PEs are cyclical and they historically have been to some extent.

Most bonds are fundamentally bets on currency. You might not think of it that way, but they are just that. Most bond yields are nominal (with exceptions like TIPS), and the amount of money you make is just a nominal amount, no matter what the currency does. The government has effective power to make all of your gains vanish easily. If your bonds yield 2-3% nominal returns, that's a 0% real return, less after taxes.

Buffett prefers productive assets like businesses, real estate, farms, et cetera. These produce actual value, year after year after year, and cannot as a universe, have negative real returns most of the time. Fixed values, promoted as being very safe on this forum are arguably the riskiest investments, and perhaps the most deceptive because of their low betas. Over ten or twenty years, unless crazy high interest rates prevail (like the period mentioned by Buffett), investors are losing tons of money versus stocks, real estate and other productive assets, the returns of which are actually driven by the ability to produce and not the relative supply of the currency in the economy, which is always on the rise in this country causing steady devaluation.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by visualguy » Sat May 19, 2018 12:07 am

rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by JoMoney » Sat May 19, 2018 12:27 am

AlohaJoe wrote:
Fri May 18, 2018 10:23 pm
Why do you listen to Buffet about bonds but ignore him about equities? Does he tell you to invest in things besides stocks? No, he doesn't.
Well, I have heard him make comments about buying a farm, but usually it's just as an analogy that when people buy a farm or private business they don't go looking for price quotes every day, and it's the same approach people should use when purchasing fractional shares of a business through stocks.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Spirit Rider » Sat May 19, 2018 7:14 am

There is a big difference between what Berkshire Hathaway invests in and what an individual should invest in.

Even when talking about individual investors, I believe Warren Buffet's institutional bias overrides any benefit of listening.

This is why I also don't believe that most people should emulate Jack Bogle's portfolio. He has a totally separate "need, ability and willingness" to take risk.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by jeffyscott » Sat May 19, 2018 7:32 am

zmaqoptyxbglp wrote:
Fri May 18, 2018 11:29 pm
US Stocks right now have a forward earnings yield of around 6%. Add in around 2% in earnings growth (tagged to real GDP growth) and that is almost an 8% real return. That's not really that bad. How consistent the current earnings yield would be in the future, I do not know. People like Shiller like to insist that PEs are cyclical and they historically have been to some extent.
"Not that bad" :?: :!: I would call 8% real (or even nominal) fantastic. Models that I have seen put expected return for US stocks at more like 0-3% real.
press on, regardless - John C. Bogle

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by oldcomputerguy » Sat May 19, 2018 7:52 am

While I respect Mr. Buffett, I believe I'll keep my bond funds, thanks.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Stormbringer » Sat May 19, 2018 7:54 am

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Completely agree, but I don't think people hold bonds because they think they are a good investment. They hold them because of their defensive characteristics. They drag down your overall return, but also reduce the volatility of your portfolio.

Buffett's decision-making is driven by cold, rational thinking and the fact that he and his family will still eat if the market drops 80%. If anything that action would be very exciting for him. However, most people have a much larger emotional component to their decision-making, cause them to freak out and sell at the worst time. Bonds help defend against that.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bgf » Sat May 19, 2018 8:09 am

I still think bond allocation should be 100% tied to one's near term cash flow needs. if you don't have near term cash flow needs, then you don't need bonds.

with bonds you are paying a price for the decreased volatility. that price is not cheap. it comes in the form of decreased expected return in comparison to equities.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by rhornback » Sat May 19, 2018 8:30 am

I keep the money I might need in the next 5 years in bonds. Or about 15% of my portfolio.

But like Buffett I really do not consider them to be a core, investment. Instead I consider it a place to park my money for life's uncertainties.

If I did not need my money right now I would just bite the bullet and invest in the S&P 500. Or others on Bogleheads might say the Total Stock Market. Or a combination of the Total Stock Market and the Total International Stock Market. Frankly I like U.S. stocks, but I digress.

But if need any of the money in the next 5 years put it in short term bonds. If you need the money in the next year I would invest in a fixed income like the high yield savings accounts that people periodically post on Bogleheads.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by mikebee » Sat May 19, 2018 8:49 am

Very interesting discussion. It seems to me that once one has enough capital (like Buffet and Bogle) then the ever present potential of the stock market to tank now and again becomes irrelevant (hence Buffet's comment) You can ignore the S&P500 fluctuations because you will always have more than enough income to cover your expenses during downturns. Once your capital reaches a certain level is there not then a case to be made for having no investment at all in bonds as inflation and taxes will kill whatever they return ? For ordinary mortals, (not B&B) if you have several million dollars available should you not invest it all in the Vanguard S&P500 or Total Stock Market and you can ignore the endless, boring arguments about asset allocations, inflation and tax inefficiency ?

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by nisiprius » Sat May 19, 2018 8:54 am

1) This board is devoted to "Investing Advice Inspired by Jack Bogle." Not everyone who calls himself or herself a Boglehead agrees with everything Bogle says or does everything he recommends--I don't--but it is relevant nevertheless.

Bogle's own investments are about 50% stocks, 50% bonds. And he's written
Pillar 2. When All Else Fails, Fall Back on Simplicity.

There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.

Although the stock market'ss wild and wooly odyssey since I wrote them makes those words seem an eon away, I believe more than ever in that basic principle: Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile. In my book, I noted that this approach was consistent with the philosophy of Benjamin Graham, author of The Intelligent Investor.
2) The mention of Graham is interesting, because Warren Buffett wrote in 2013
And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s
book The Intelligent Investor, which I bought in 1949.
So what, exactly, did Graham say in The Intelligent Investor?
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums. According to tradition the sound reason for increasing the percentage in common stocks would be the appearance of the "bargain price" levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgement of the investor the market level has become dangerously high....

[However] we can give the investor no reliable rules by which to reduce his common-stock holdings toward the 25% minimum and then rebuild them later to the 75% maximum. We can urge that in general the investor should not have more than one-half in equities unless he is has strong confidence in the soundness of his stock position and is sure that he could view of market decline of the 1969-70 type with equanimity....

We are thus led to put forward for most of our readers what may appear to be an oversimplified 50-50 formula...
My summary:
  • Fundamental guiding principle: everyone, always, stay within the range of 25%-75% stocks.
  • Baseline: 50% stocks.
  • "In general," don't go above 50% stocks. In fact,
  • For "most of our readers," just stick with 50-50.
3) Buffett's writing, unlike Bogle's, is often mysterious, leaving many unanswered questions. It is never clear to me whether he is talking about his principles for managing Berkshire Hathaway, his recommendations to his trustees for managing his wife's inheritance, or advising you and me and ordinary "mass affluent" retirement savers and retirees. (Notice, by the way, that regardless of what Buffett says he thinks about bonds, he has nevertheless recommended 10% bonds, not zero, for his wife's portfolio).

But if you are going to follow Buffett, follow Buffett. What investments does he recommend other than stocks and bonds?
Last edited by nisiprius on Sat May 19, 2018 9:39 am, edited 1 time in total.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by dbr » Sat May 19, 2018 9:34 am

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Nothing. Buffet's advice is to be 90% S&P 500 at the very least. If you think this is advice that should apply to you, then that is what it is. How well do you understand what being 90% in the S&P 500 could be like. Would that meet your wants and needs? If so, that is the advice.

But a more serious question, I mean a really serious question, is what does Buffett saying bonds are a terrible investment right now have to do with how you invest?

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by stemikger » Sat May 19, 2018 10:04 am

I love Buffett, but I don't have the stomach for 90% stocks. I will stick with 60/40 and hopefully it gets me there.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by jeffyscott » Sat May 19, 2018 10:08 am

dbr wrote:
Sat May 19, 2018 9:34 am
Buffet's advice is to be 90% S&P 500 at the very least. If you think this is advice that should apply to you, then that is what it is.
If your net worth is about $85,000,000,000, like Mr. Buffet, then that 10% is still over $8 billion. A 99% loss of the other 90% would still leave him with just under $9 billion. I don't think someone with that much, who has been very lucky (or uniquely skilled), is a good source of an appropriate strategy for mere millionaires with, most likely, investment skills that are not far from average.
press on, regardless - John C. Bogle

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by dziuniek » Sat May 19, 2018 10:09 am

bgf wrote:
Sat May 19, 2018 8:09 am
I still think bond allocation should be 100% tied to one's near term cash flow needs. if you don't have near term cash flow needs, then you don't need bonds.

with bonds you are paying a price for the decreased volatility. that price is not cheap. it comes in the form of decreased expected return in comparison to equities.
Which may or may not happen, hence "expected".

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by whodidntante » Sat May 19, 2018 10:15 am

Bonds are a terrible investment compared to stocks is his point. It's an expected return argument and he's right about that. Many bogleheads own bonds but I don't see anyone arguing that bonds have higher expected returns than stocks right now.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by dbr » Sat May 19, 2018 10:20 am

whodidntante wrote:
Sat May 19, 2018 10:15 am
Bonds are a terrible investment compared to stocks is his point. It's an expected return argument and he's right about that. Many bogleheads own bonds but I don't see anyone arguing that bonds have higher expected returns than stocks right now.
It comes down to a simple issue of recognizing that investing is risk and return and not just return. Buffett is a master at managing risk his own way but he didn't say anything about that. The individual investor such as most of us does not and cannot practice Buffett's methods of managing risk.

It is just possible that Buffett really believes that the American economy is so reliable that there is no long term risk in buying and holding "stocks in America." Most people here would advise looking twice before doing such a thing and also looking more carefully at what risk in stocks really is all about.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bgf » Sat May 19, 2018 11:23 am

I've yet to read a convincing argument anywhere by anyone that an internationally diversified portfolio of 10,000+ stocks across dozens of countries presents such a systemic risk that government bonds, which are backed by the economies made up by those very same companies and also subject to currency risk, somehow provide protection against a total loss that the equities do not.

The risk is not of total loss, it is of near term return, i.e. volatility, and the negative effects on one's required cash flows.

If you don't have the requirement of near term cash flows, i dont see the need for government bonds.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Rainier » Sat May 19, 2018 11:35 am

whodidntante wrote:
Sat May 19, 2018 10:15 am
Bonds are a terrible investment compared to stocks is his point. It's an expected return argument and he's right about that. Many bogleheads own bonds but I don't see anyone arguing that bonds have higher expected returns than stocks right now.
It's entertaining seeing people argue against Warren Buffett here.

But but but...I'm different, my bonds are better, he really meant this, no he really meant that, no he really meant this, he has billions of dollars.

Nope, he meant what he said and it doesn't matter if you have $1 billion or $1 thousand to invest....bonds are terrible investments.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by sschullo » Sat May 19, 2018 11:37 am

I invest 70% of my portfolio in bonds, not because of returns, but because of balance. Buffett doesn't have to worry about balancing his portfolio (are you kidding?!). He is in a different universe. And what he says is great for him, and he is correct for him.
As a mere mortal and a nobody, I have a balanced portfolio because if I put too much equity risk in my portfolio as a 70-year old, I could be in deep trouble--losing 50% of my equity position would be very damaging for the rest of my short life. I had already lost 70% during the 2000 tech crash with a 95% equity exposure, and I will never want to make that mistake again. As a 55-year-old at the time, I was extremely lucky to have just enough time to recover and that I had real estate investments.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by dbr » Sat May 19, 2018 11:40 am

sschullo wrote:
Sat May 19, 2018 11:37 am
I invest 70% of my portfolio in bonds, not because of returns, but because of balance. Buffett doesn't have to worry about balancing his portfolio (are you kidding?!). He is in a different universe. And what he says is great for him, and he is correct for him.
As a mere mortal and a nobody, I have a balanced portfolio because if I put too much equity risk in my portfolio as a 70-year old, I could be in deep trouble--losing 50% of my equity position would be very damaging for the rest of my short life. I had already lost 70% during the 2000 tech crash with a 95% equity exposure, and I will never want to make that mistake again. As a 55-year-old at the time, I was extremely lucky to have just enough time to recover and that I had real estate investments.

Steve
Yes, it is a simple matter of contemplating the consequences for you of some of the possible outcomes of any given asset allocation and deciding if you would want to be there.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Rainier » Sat May 19, 2018 12:40 pm

sschullo wrote:
Sat May 19, 2018 11:37 am
I invest 70% of my portfolio in bonds, not because of returns, but because of balance. Buffett doesn't have to worry about balancing his portfolio (are you kidding?!). He is in a different universe. And what he says is great for him, and he is correct for him.
As a mere mortal and a nobody, I have a balanced portfolio because if I put too much equity risk in my portfolio as a 70-year old, I could be in deep trouble--losing 50% of my equity position would be very damaging for the rest of my short life. I had already lost 70% during the 2000 tech crash with a 95% equity exposure, and I will never want to make that mistake again. As a 55-year-old at the time, I was extremely lucky to have just enough time to recover and that I had real estate investments.

Steve
Buffett isn't saying bonds are a horrible investment for himself with his billions of dollars, he is saying they are a horrible investment for everybody.

How did you lose 70% in the 2000 crash? Were you 100% in the NASDAQ? Did you invest at the very top and sell out at the very bottom? Buffett has never advocated for being 100% in the NASDAQ.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by outsicktoday » Sat May 19, 2018 12:43 pm

visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
With the housing shortage in areas like Southern California I would have to agree with that. I was burned so bad in real estate before that I hesitate to get into it, plus I tried to play landlord and that was not a lot of fun at all.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by dbr » Sat May 19, 2018 12:46 pm

Rainier wrote:
Sat May 19, 2018 12:40 pm
sschullo wrote:
Sat May 19, 2018 11:37 am
I invest 70% of my portfolio in bonds, not because of returns, but because of balance. Buffett doesn't have to worry about balancing his portfolio (are you kidding?!). He is in a different universe. And what he says is great for him, and he is correct for him.
As a mere mortal and a nobody, I have a balanced portfolio because if I put too much equity risk in my portfolio as a 70-year old, I could be in deep trouble--losing 50% of my equity position would be very damaging for the rest of my short life. I had already lost 70% during the 2000 tech crash with a 95% equity exposure, and I will never want to make that mistake again. As a 55-year-old at the time, I was extremely lucky to have just enough time to recover and that I had real estate investments.

Steve
Buffett isn't saying bonds are a horrible investment for himself with his billions of dollars, he is saying they are a horrible investment for everybody.

How did you lose 70% in the 2000 crash? Were you 100% in the NASDAQ? Did you invest at the very top and sell out at the very bottom? Buffett has never advocated for being 100% in the NASDAQ.
One point of agreement is that this is exactly what he is saying. People have to either like it or lump it that he is saying it. Buffett has an abiding faith in the value of the American economy and trusts that no one will be let down even for the long run future. It is up to the individual investor to decide if he wants to invest by following that point of view. I would suggest people give the issue thought beyond the pronouncement that bonds are a terrible investment right now. If someone calls that arguing against Buffett as giving good investment advice, then so be it.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by drk » Sat May 19, 2018 12:55 pm

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
I like this. I can now consistently say that Warren Buffett has no credibility giving advice to amateur, non-billionaire investors, whereas all the people who parrot Buffett's advice to the custodian of his wife's trust as the basis for their argument for excluding ex-US equities have to tie themselves into knots explaining why his other advice should be followed while this advice should not. It's much easier (and safer!) to just ignore the guy. Remember: media personalities like him are the noise that prevents people from staying the course.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Rainier » Sat May 19, 2018 12:56 pm

outsicktoday wrote:
Sat May 19, 2018 12:43 pm
visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
With the housing shortage in areas like Southern California I would have to agree with that. I was burned so bad in real estate before that I hesitate to get into it, plus I tried to play landlord and that was not a lot of fun at all.
Yep, housing is awesome. Has some great features like:

- Extremely high commissions to buy and sell
- Other large transaction costs above commissions
- Very low liquidity
- Ongoing maintenance and tax expenses
- Long term returns about equal to inflation (this is my favorite)

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bondsr4me » Sat May 19, 2018 1:04 pm

First things first; there's no bigger Warren Buffett fan than me.
I have tremendous respect for him and his achievements.
I only wish I had known about him many years ago.

His option on bonds is his opinion...that's OK by me.
I just don't agree with it.
If you want/need "dependable" income during retirement, holding mostly bonds is the way to go (at least for me).
Common stocks dividends are not as dependable as bond interest.
From October 2007 to March 2009, many stocks/indices saw a reduction of 50% +/-.
Many people panicked and sold stocks at the worst possible time.
Not only did they suffer capital losses, they also lost their dividends upon selling these stocks.
Warren certainly can afford to sit tight....but this is not what I want to face during my retirement.
Every investor needs to do what they can live with when the stuff hits the fan.

Don

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by 3funder » Sat May 19, 2018 1:08 pm

Rainier wrote:
Sat May 19, 2018 12:56 pm
outsicktoday wrote:
Sat May 19, 2018 12:43 pm
visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
With the housing shortage in areas like Southern California I would have to agree with that. I was burned so bad in real estate before that I hesitate to get into it, plus I tried to play landlord and that was not a lot of fun at all.
Yep, housing is awesome. Has some great features like:

- Extremely high commissions to buy and sell
- Other large transaction costs above commissions
- Very low liquidity
- Ongoing maintenance and tax expenses
- Long term returns about equal to inflation (this is my favorite)
Haha. Love it (the list of "great" features).

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siamond
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by siamond » Sat May 19, 2018 1:11 pm

zmaqoptyxbglp wrote:
Fri May 18, 2018 11:29 pm
US Stocks right now have a forward earnings yield of around 6%. Add in around 2% in earnings growth (tagged to real GDP growth) and that is almost an 8% real return. That's not really that bad.
I am afraid you are confusing earning yield and dividend yield. Expected (real) returns for the US stock market in the coming 10/15 years are WAY lower than 8% nowadays. Plus remember those are expected returns, in the statistical sense, hence the center point of a wide range of possibilities. Here are two useful wiki pages:
https://www.bogleheads.org/wiki/Histori ... ed_returns
https://www.bogleheads.org/wiki/P/E

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by abuss368 » Sat May 19, 2018 1:19 pm

visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
What about REITs - U.S. and International?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by ThrustVectoring » Sat May 19, 2018 1:22 pm

bgf wrote:
Sat May 19, 2018 8:09 am
I still think bond allocation should be 100% tied to one's near term cash flow needs. if you don't have near term cash flow needs, then you don't need bonds.

with bonds you are paying a price for the decreased volatility. that price is not cheap. it comes in the form of decreased expected return in comparison to equities.
This, 100%. Park enough cash or short-term bonds to cover expected or possible cash flow needs, dump the rest into stocks. If your liquid net worth is high enough to buy real estate and not have it dominate your portfolio, do that and take out as much of a 30-year fixed mortgage as you can.

30-year fixed rate mortgages are the best way for retail investors to short bonds. When something is terrible, you should short the daylights out of it. Bonds are terrible, so you should be financing as much real estate as you can afford to on your salary and investing the cash flow into stocks. A good rule of thumb is to not have your monthly mortgage payments exceed your monthly discretionary income and not have it exceed your rental income - that way, you're fine if you lose either your job or your tenant.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by abuss368 » Sat May 19, 2018 1:22 pm

Spirit Rider wrote:
Sat May 19, 2018 7:14 am
There is a big difference between what Berkshire Hathaway invests in and what an individual should invest in.
I believe this has historically been a problem for many investors to grasp. Many investors believe that investing in the companies Mr. Buffett does will yield the same results. Nothing could be further from reality as Mr. Buffett has many investment doors open to him that ordinary investors do not and never will. Investments such as his many warrants, derivatives, preferred stock, options, etc.

I think there may have been a mutual funds or EFT for investors that tried to mimic what he invests in.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by siamond » Sat May 19, 2018 1:26 pm

abuss368 wrote:
Sat May 19, 2018 1:19 pm
visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
What about REITs - U.S. and International?
US REITs were quite correlated in the past with small and mid size value stocks (SCV/MCV), while returning less premium. I see little reason for Int'l REITs to behave otherwise, although the indices are defined a bit differently. Comparing the diversification properties of REITs with SCV/MCV, one can notice a lot of overlap, and also that REITs were less effective. You can read more details here. Took me forever to get the point, and to consolidate the REIT position in my AA with my SCV/MCV tilt. Dumb of me. I've learned my lesson now.

EDIT: clarified after re-reading my own blog post! :wink:
Last edited by siamond on Sat May 19, 2018 1:52 pm, edited 1 time in total.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Alexa9 » Sat May 19, 2018 1:26 pm

Buffet wants everyone to drive up Apple's stock price for obvious reasons. He is a little less slimy than Icahn.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by abuss368 » Sat May 19, 2018 1:28 pm

The financial crisis taught a really valuable lesson. And that is, bonds provided: 1) safety, and more importantly 2) a pool of assets that were available to rebalance to stocks. In hindsight, staying the course was the best decision we made.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by abuss368 » Sat May 19, 2018 1:33 pm

Alexa9 wrote:
Sat May 19, 2018 1:26 pm
Buffet wants everyone to drive up Apple's stock price for obvious reasons. He is a little less slimy than Icahn.
Ouch. He always presents himself well on CNBC.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by drk » Sat May 19, 2018 1:38 pm

Alexa9 wrote:
Sat May 19, 2018 1:26 pm
Buffet wants everyone to drive up Apple's stock price for obvious reasons. He is a little less slimy than Icahn.
I'm a Buffett skeptic, but that's really unfair.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bberris » Sat May 19, 2018 1:46 pm

drk wrote:
Sat May 19, 2018 1:38 pm
Alexa9 wrote:
Sat May 19, 2018 1:26 pm
Buffet wants everyone to drive up Apple's stock price for obvious reasons. He is a little less slimy than Icahn.
I'm a Buffett skeptic, but that's really unfair.
There's more about Saint Warren. I won't discuss it here but you can look up Haiti, the Clinton Foundation, and his Clayton Homes. He was criticized from both ends of the political spectrum.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bondsr4me » Sat May 19, 2018 2:01 pm

Alexa9 wrote:
Sat May 19, 2018 1:26 pm
Buffet wants everyone to drive up Apple's stock price for obvious reasons. He is a little less slimy than Icahn.
-1000

Warren recommends Vanguards S&P fund.

You’re way outta line on this one.

Don

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nisiprius
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by nisiprius » Sat May 19, 2018 2:21 pm

My objection to Buffett is that he never seems to explain himself. He says what he says. What he says is short, cryptic, and incomplete. He does not have some longer book in which he fills things out.

Almost everyone who cites Buffett puts an interpretation on Buffett's words, and many fail to quote him correctly.

Buffett consistently tells people to invest in "an S&P 500 index fund" and sometimes even mentions Vanguard:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)
As far as I know, he has never said whether this means "do not put any money into small-caps," "do not substitute a total market index fund, even Vanguard's," "do not put any money into international stocks." He doesn't say. He could say "to keep it simple, I suggest" and talk about small-caps and international stocks elsewhere. He doesn't. It's always the S&P 500. I don't know why. AFAIK he hasn't said.

He doesn't say, in so many words, "do not invest in international stocks." He says
Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.
Does he think putting a portion of your stock allocation into international is "betting against America?" I don't know. AFAIK he hasn't said.

He frequently attacks "bonds."
Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.
He never mentions Treasury inflation-protected securities (TIPS). He never says why. Are his comments supposed to apply to TIPS, too, or only to nominal bonds? I don't know. AFAIK he hasn't said.

To me a big danger in Warren Buffett's remarks is that it is so easy to think he has said things that he has not said.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bgf » Sat May 19, 2018 5:04 pm

I think if you read his shareholder letters you'd be less unsure of what he says. Also, there would be no question as to context or his audience. The shareholder letters are written to Berkshire shareholders. What he says on CNN or whatever in sound bites should be largely ignored for what he says in writing.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by nisiprius » Sat May 19, 2018 6:31 pm

bgf wrote:
Sat May 19, 2018 5:04 pm
I think if you read his shareholder letters you'd be less unsure of what he says. Also, there would be no question as to context or his audience. The shareholder letters are written to Berkshire shareholders. What he says on CNN or whatever in sound bites should be largely ignored for what he says in writing.
All of my quotations above are taken verbatim from Berkshire shareholder letters. None are from interviews or sound bites.

Now, if your point is that the shareholder letters should be interpreted as referring solely to how Buffett manages his business, and not as advice to ordinary individual investors, I would be fine with that, we agree, and you need not read the rest of this post. Except that people are constantly quoting him in this forum and elsewhere as if his remarks applied to individual personal investing.

Since the thread title refers to "Buffett says bonds are a terrible investment now," let's look at my specific questions about TIPS. Please consult the shareholder letters and tell me what his opinion is about TIPS, as an investment for e.g. individuals in retirement. The only reference to TIPS I can find is in the 1999 letter:
In addition, we have hypothesized 2% inflation. Charlie and I have no particular conviction about the accuracy of 2%. However, it’s the market’s view: Treasury Inflation-Protected Securities (TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going to be higher than that, you can profit by simply buying TIPS and shorting Governments.
The passage I quoted from above, is from the 2011 letter, and here it is again with more context:
Investment possibilities are both many and varied. There are three major categories, however, and it’s important to understand the characteristics of each. So let’s survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.
Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”

For tax-paying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It’s noteworthy that the implicit inflation “tax” was more than triple the explicit income tax that our investor probably thought of as his main burden. “In God We Trust” may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments – and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Under today’s conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain – either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we’ve exploited both opportunities in the past – and may do so again – we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”
He then moves on to other investment categories; the second is, roughly, gold; the third is "investment in productive assets, whether businesses, farms, or real estate."

I ask you: reading Buffett's words above, or as much more of the letter as you care to, tell me: exactly what does Buffett have to say about TIPS?
Last edited by nisiprius on Sat May 19, 2018 7:07 pm, edited 3 times in total.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by david1082b » Sat May 19, 2018 6:44 pm

WB did seem to recommend against non-US stocks here:
Most employer-run 401(k) retirement plans offer multiple mutual funds with different assets strategies, but Buffett warned against going with those options, saying "you'll do very well with an S&P index."

He added: "And don't let them talk to you about other index funds…and say you know, you have to have foreign or maybe you can pick a better industry. You'll almost always find it comes with bigger fees."
https://www.cnbc.com/2017/05/12/warren- ... -time.html

"S&P index" means the 500 of course, not the small 600 or mid 400. I can't find any quotes from WB talking about the small 600 or mid 400.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bgf » Sat May 19, 2018 7:20 pm

Buffett is an investor, not a personal financial advisor. He has always said, first and foremost, do not invest what you cannot afford to lose. His remarks on LTCM drive this home. This, anyway, is how i have read his advice and his lessons.

To assume that Buffett advises your average 70 year old who relies entirely on his portfolio to survive to be 90% SP500 for his entire net worth attributes a, frankly, stupid remark to an exceedingly intelligent and expert man.

Look at how he runs Berkshire. Claims and cash flow requirements are covered by the highest quality fixed income. Berkshire is so conservatively managed that it is actually hurting its returns.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by 3funder » Sat May 19, 2018 7:41 pm

As far as I am concerned, there are stocks and there are bonds. I don't think about other asset classes (w/the exception of cash or cash-like instruments for emergencies and near-term big ticket items).

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by ralph124cf » Sat May 19, 2018 11:18 pm

Buffet says that bonds are a terrible investment. I can agree with that.

He does NOT say don't buy bonds. Berkshire owns a lot of short term high quality "bonds" (debt instruments-many of which retail investors do not have access to). This provides liquidity for future opportunities that Buffet does not see at this moment.

Ralph

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