Buffett Says Bonds Among Most Dangerous Assets on Inflation

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Greenie
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Buffett Says Bonds Among Most Dangerous Assets on Inflation

Post by Greenie » Thu Feb 09, 2012 2:26 pm

I doubt anyone here over 30 is going to 100% stocks again anytime soon.
Read what Buffet just said.
http://finance.yahoo.com/news/buffett-s ... 16634.html

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by damjam » Thu Feb 09, 2012 2:32 pm

" Laurence D. Fink, chief executive officer of BlackRock Inc. Fink said this week that investors should be 100 percent in equities, because of depressed stock valuations and the Federal Reserve's pledge to keep interest rates low."

I'm speechless.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Mitchell777 » Thu Feb 09, 2012 2:56 pm

The article makes sense to me, but both Mr Buffet and Fink are very wealthy. If they lose 50% of their wealth, even at their ages, it has no real impact on their lives other than the inheritance they pass down or charitable giving (which both have said they will give 50%). Or if you are younger it is fine to be heavy in equities. Just not sure how many people very near, or in, retirement are comfortable with little to no bonds. TIPS seem like a nice compromise

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by nisiprius » Thu Feb 09, 2012 3:08 pm

Gee, if only there were some sort of bond whose principal wasn't a fixed nominal dollar value, but was, oh, I don't know, indexed to the CPI or something. Oh, I know what you'll say: "Dreamer! Get your head out of the clouds." Well, OK, but a fellow can wish.
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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by CaliJim » Thu Feb 09, 2012 3:14 pm

I looked into my crystal ball - I can't tell if it is getting cloudy, or if the clouds are clearing.

Image



What is important is the role bonds play in a balanced portfolio.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Lbill » Thu Feb 09, 2012 3:23 pm

I'm shocked Buffett is saying to buy stocks and avoid bonds. :shock: I'm trying to remember when he last recommended buying bonds -- did he do that back in the early 80s when there were double-digit rates? I'm thinking NOT. Too bad. . . But he could be right about not recommending bonds now. Don't think he'll get the Genius Award for that one though. What about TIPS, though???
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jjustice
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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by jjustice » Thu Feb 09, 2012 3:35 pm

The trouble with the sort of bond Nisiprius wishes for (above) is that they would seduce people who are fixated on the danger of inflation into buying (and holding) them even when they were guaranteed to have real losses.

John

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by DetroitRed » Thu Feb 09, 2012 3:46 pm

Lbill wrote:I'm shocked Buffett is saying to buy stocks and avoid bonds. :shock: I'm trying to remember when he last recommended buying bonds -- did he do that back in the early 80s when there were double-digit rates? I'm thinking NOT. Too bad. . . But he could be right about not recommending bonds now. Don't think he'll get the Genius Award for that one though. What about TIPS, though???
I believe Buffett actually has a pretty good record on this. In 1979, at the same time magazines like Business Week had front page articles like "The Death of Equities," on 8/13/79 he recommended buying stocks --

You Pay A Very High Price In The Stock Market For A Cheery Consensus 8/6/79
http://www.forbes.com/2008/11/08/buffet ... tocks.html

In the late 90s when there was lots of conventional wisdom that stocks were going to go up forever, he went on record questioning the growth projections - http://money.cnn.com/magazines/fortune/ ... 22/269071/

It's easy to look back and say that these were both obvious but at both times he was definitely going against conventional wisdom.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by huntertheory » Thu Feb 09, 2012 3:48 pm

This is supposed to be an adaptation from his shareholder letter. I'll be interested in reading the whole thing to see if there is any additional context (there might not be).

As it stands it seems both misleading and simplistic. He doesn't even say that they are 100% equities are what he does -- indeed, he mentions how Berkshire holds many "mostly short maturity" bonds of various sorts -- but then goes on to talk about how much better stocks are than bonds. He also doesn't talk about investing time horizons, i.e. if you're 25 his advice makes a lot more sense than if you're 75, but he doesn't distinguish those scenarios.

I get the impression that he's trying to attack a bogeyman, one peddled by some but certainly not on Bogleheads, that people should avoid stocks and hold bonds, gold and real estate because they are "real" and provide "real income," but that might be me projecting and in any event I don't think many people are doing even that.

But avoiding the above, is Buffett committing the "time diversification" fallacy here? And has there ever been a consensus that it is (or is not) a fallacy? I still think this is one of the most vexing questions of investing. Compare:

http://www.norstad.org/finance/risk-and-time.html

with

http://www.bogleheads.org/forum/viewtopic.php?p=1081891

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by PreserveCapital » Thu Feb 09, 2012 3:59 pm

Now I'm not sure how wholly-owned companies are accounted for here, they're probably separate. But in terms of asset allocation among equities, bonds, and cash, BRK has, according to the article, as of 9/30/2011:

68 billion equities

34 billion fixed income

34.8 billion cash

Based on a current market cap of around 200 billion--and I think back in September the market cap was considerably lower--Berkshire Hathaway is holding about 17.5% of its entire net worth just in cash and cash equivalents.


Anyway it sounds like overall, that's pretty close to a "50/50" portfolio to me, if cash is lumped in with the fixed income.

Based on a 200 billion market cap it's implied that there's also about an equivalent amount, say 60 or 70 billions, worth of operating businesses mixed in with all of the other assets. So that provides further diversification. I guess it's roughly equivalent to having one-third of a person's net worth represented by the cash flow from their occupation; 1/3 cash/fixed; 1/3 equities.

The most fascinating thing about the article is that Buffett distinctly seems to be giving some very strong advice for individual investors to go 100% equities but then when you actually see the breakdown of his company's portfolio, it's not really that way at all.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by ladders11 » Thu Feb 09, 2012 4:09 pm

PreserveCapital wrote:The most fascinating thing about the article is that Buffett distinctly seems to be giving some very strong advice for individual investors to go 100% equities but then when you actually see the breakdown of his company's portfolio, it's not really that way at all.
I think that Berkshire has definite needs for cash. It seems like he is committed to keeping at least $10B: this could be as a sort of "emergency fund" to help their businesses, or it could be a store of "dry powder" should stocks become cheap. Also, it could be a requirement due to derivative holdings, or a necessity to maintain their credit rating.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by The_J » Thu Feb 09, 2012 4:26 pm

PreserveCapital wrote:Now I'm not sure how wholly-owned companies are accounted for here, they're probably separate. But in terms of asset allocation among equities, bonds, and cash, BRK has, according to the article, as of 9/30/2011:

68 billion equities

34 billion fixed income

34.8 billion cash

Based on a current market cap of around 200 billion--and I think back in September the market cap was considerably lower--Berkshire Hathaway is holding about 17.5% of its entire net worth just in cash and cash equivalents.


Anyway it sounds like overall, that's pretty close to a "50/50" portfolio to me, if cash is lumped in with the fixed income.

Based on a 200 billion market cap it's implied that there's also about an equivalent amount, say 60 or 70 billions, worth of operating businesses mixed in with all of the other assets. So that provides further diversification. I guess it's roughly equivalent to having one-third of a person's net worth represented by the cash flow from their occupation; 1/3 cash/fixed; 1/3 equities.

The most fascinating thing about the article is that Buffett distinctly seems to be giving some very strong advice for individual investors to go 100% equities but then when you actually see the breakdown of his company's portfolio, it's not really that way at all.
Except you can't compare the investments of a corporation to the investments of an individual. 99.9% of investors don't have a net worth high enough where they can hold onto a portion in cash in case they feel like buying a multi-billion dollar company. They can't negotiate purchasing preferred shares with a 10% dividend from a company that needs a billion dollar infusion. They can't make a sufficient investment into the stock of a company to basically buy themselves a seat on the board, in order to steer the direction of the company. A $200 billion corporation and an individual investor are not the same thing. They shouldn't try to invest the same way.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by bottlecap » Thu Feb 09, 2012 4:30 pm

nisiprius wrote:Gee, if only there were some sort of bond whose principal wasn't a fixed nominal dollar value, but was, oh, I don't know, indexed to the CPI or something. Oh, I know what you'll say: "Dreamer! Get your head out of the clouds." Well, OK, but a fellow can wish.
Too funny.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by PreserveCapital » Thu Feb 09, 2012 4:41 pm

The_J wrote:
PreserveCapital wrote:Now I'm not sure how wholly-owned companies are accounted for here, they're probably separate. But in terms of asset allocation among equities, bonds, and cash, BRK has, according to the article, as of 9/30/2011:

68 billion equities

34 billion fixed income

34.8 billion cash

Based on a current market cap of around 200 billion--and I think back in September the market cap was considerably lower--Berkshire Hathaway is holding about 17.5% of its entire net worth just in cash and cash equivalents.


Anyway it sounds like overall, that's pretty close to a "50/50" portfolio to me, if cash is lumped in with the fixed income.

Based on a 200 billion market cap it's implied that there's also about an equivalent amount, say 60 or 70 billions, worth of operating businesses mixed in with all of the other assets. So that provides further diversification. I guess it's roughly equivalent to having one-third of a person's net worth represented by the cash flow from their occupation; 1/3 cash/fixed; 1/3 equities.

The most fascinating thing about the article is that Buffett distinctly seems to be giving some very strong advice for individual investors to go 100% equities but then when you actually see the breakdown of his company's portfolio, it's not really that way at all.
Except you can't compare the investments of a corporation to the investments of an individual. 99.9% of investors don't have a net worth high enough where they can hold onto a portion in cash in case they feel like buying a multi-billion dollar company. They can't negotiate purchasing preferred shares with a 10% dividend from a company that needs a billion dollar infusion. They can't make a sufficient investment into the stock of a company to basically buy themselves a seat on the board, in order to steer the direction of the company. A $200 billion corporation and an individual investor are not the same thing. They shouldn't try to invest the same way.
An individual investing for retirement has far LESS ability to allocate 100% of investable assets to equities than does a 200 billion market cap corporation. You seem to have gotten the point bacwards.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by fandango » Thu Feb 09, 2012 4:49 pm

[Trolling/political post removed by Mod]

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Justin618
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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Justin618 » Thu Feb 09, 2012 5:13 pm

From his annual letter http://finance.fortune.cnn.com/2012/02/ ... er-letter/
From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.
if only there were some sort of bond whose principal wasn't a fixed nominal dollar value, but was, oh, I don't know, indexed to the CPI or something.
VG's quoted current real yield of the Tips fund is -0.62%. I guess that implies one is locking in a loss of purchasing power (not that nominals would do any better right now).

Very interesting discussion from Buffett: Bonds - No, Gold - No, Equity - Yes. So, I guess it's Stocks for the Long Run after all.

Justin
"Investing is simple, but not easy" - Buffett.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by DetroitRed » Thu Feb 09, 2012 6:07 pm

Ps: Take a look at the comments section of Buffett's article on Fortune.com

http://finance.fortune.cnn.com/2012/02/ ... er-letter/

The Gold Bugs are out in force.

As folks have pointed out, Buffett doesn't do a good job of talking about asset allocation in this excerpt, but once you read the comments, you see what he's up against. If you don't want to read the comments section, I'll save you the time by summarizing what 90% of the posters are saying: Gold is the best investment. Always. Forever. End of story.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Clearly_Irrational » Thu Feb 09, 2012 6:22 pm

DetroitRed wrote:As folks have pointed out, Buffett doesn't do a good job of talking about asset allocation in this excerpt, but once you read the comments, you see what he's up against. If you don't want to read the comments section, I'll save you the time by summarizing what 90% of the posters are saying: Gold is the best investment. Always. Forever. End of story.
I pro-gold to some extent but even I would completely disagree with that statement.

The main message I got from Buffett was that the best way to wealth was direct business ownership, but that's just my interpretation.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Liquid » Thu Feb 09, 2012 6:53 pm

[Trolling/political post removed by Mod]

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by htdrag11 » Thu Feb 09, 2012 7:18 pm

I consider both Buffett and Fink are "pump and dump" charlatans, each with his own agenda and both are disingenuous.

Buffett can get sweetheart deals where none of us can negotiate. His past records are just his past records, not a forward looking trend. Putting 100% in equities is not quite the Bogle way.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by pinebarrens1 » Thu Feb 09, 2012 7:54 pm

early in 2011, Buffet said treasuries are the last place you want to be. Long term treasuries went on to return 30+ percent in 2011. So Buffett was completely wrong.

for an alternate view on treasuries going foward, see this video

http://www.youtube.com/watch?v=65NXbnfNDBU

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Liquid » Thu Feb 09, 2012 8:26 pm

I think Mr. Buffett would be the first to admit that he cannot predict the future. My sense is that his decisions are based on current valuations rather than future predictions.

One of his few and most famous "predictions" from Snowball:

"He put up a slide to illustrate how, for several years, the market's valuation had outstripped the economy's growth by an enormous degree. This meant, Buffett said, that the next seventeen years might not look much better than that long stretch from 1964 to 1981 when the Dow had gone exactly nowhere– that is, unless the market plummeted. "If I had to pick the most probable return over that period," he said, "it would probably be six percent." Yet a recent PaineWebber-Gallup poll had shown that investors expected stocks to return thirteen to twenty-two percent."

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by The_J » Thu Feb 09, 2012 11:27 pm

PreserveCapital wrote: An individual investing for retirement has far LESS ability to allocate 100% of investable assets to equities than does a 200 billion market cap corporation. You seem to have gotten the point bacwards.
Actually you have more ability to, because it's pretty simple for an individual to make a 100% allocation, but I know that's not what you mean. However, you seem to have completely missed my point. My point is that when you say something to the effect that Buffett doesn't believe what he's saying, or he doesn't put his money where his mouth is, based on the fact that Berkshire's capital is not 100% in equities, you're relying on the false premise that an individual investor and a multi-billion dollar corporation are similar. Because the two are so incredibly dissimilar, Buffett can believe that the correct course for the individual investor is entirely different than the correct course for the corporation.

Whether or not a 100% equities allocation (or something substantially close to that) is a good idea for an individual is a separate issue.
Last edited by The_J on Thu Feb 09, 2012 11:49 pm, edited 1 time in total.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by jda » Thu Feb 09, 2012 11:33 pm

pinebarrens1 wrote:early in 2011, Buffet said treasuries are the last place you want to be. Long term treasuries went on to return 30+ percent in 2011. So Buffett was completely wrong.

for an alternate view on treasuries going foward, see this video

http://www.youtube.com/watch?v=65NXbnfNDBU
One year return doesn't really mean anything, it's like how everyone went after Bill Gross last year after he trimmed his treasure holding and the treasuries went up. As a common belief here that you can't time the market, neither can't Buffet and Gross but it doesn't mean they aren't correct. Maybe in the near future the rate shots up and the 30%+ return turns negative.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Sam2 » Thu Feb 09, 2012 11:43 pm

I agree with The_J. Buffet's time frame is infinite, but not Bogleheads. He likes to be in a spotlighte, but he has his conglomerate in mind not individuals.
There things he talks about, which is a contradiction to his previous statements, but I don't want to get into politics.

I admire Buffet as an investor, but as a person he is fallen from the sky.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by stemikger » Fri Feb 10, 2012 7:06 am

htdrag11 wrote:I consider both Buffett and Fink are "pump and dump" charlatans, each with his own agenda and both are disingenuous.

Buffett can get sweetheart deals where none of us can negotiate. His past records are just his past records, not a forward looking trend. Putting 100% in equities is not quite the Bogle way.
This is just silly and not accurate.
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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by rkhusky » Fri Feb 10, 2012 7:27 am

The difference between Buffett and the rest of us is that he can either buy an entire company or a significant portion of it, and then affect changes in the management of the company. This differs significantly even from an active manager, who researches companies and buys stocks in those that seem to be either under-valued or have a good potential for growth. Most active managers cannot fire CEO's or bring in new management teams.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Valuethinker » Fri Feb 10, 2012 9:40 am

jjustice wrote:The trouble with the sort of bond Nisiprius wishes for (above) is that they would seduce people who are fixated on the danger of inflation into buying (and holding) them even when they were guaranteed to have real losses.

John
Not quite. If inflation is *as expected* they would have real losses, and not for very long maturities of those securities (for sake of argument I shall call them 'Real Return Bonds').

So these RRBs would have a negative *expected* real return. But if inflation is higher than the 'breakeven inflation rate' they would still provide superior returns to their nominal counterparts, at less risk.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Valuethinker » Fri Feb 10, 2012 9:43 am

PreserveCapital wrote:Now I'm not sure how wholly-owned companies are accounted for here, they're probably separate. But in terms of asset allocation among equities, bonds, and cash, BRK has, according to the article, as of 9/30/2011:

68 billion equities

34 billion fixed income

34.8 billion cash



The most fascinating thing about the article is that Buffett distinctly seems to be giving some very strong advice for individual investors to go 100% equities but then when you actually see the breakdown of his company's portfolio, it's not really that way at all.
Quite distorted though:

- BH is one of the world's largest insurance companies, they hold cash and bonds against those policies-- the gross picture is not very helpful

- BH does publish its own estimate of 'book value' of its equities, which is significantly greater than what is in the accounting rules Book Value. Which is the above being quoted? It's easy to value its quoted equity holdings, but its unquoted holdings (eg Netjet, railways, utilities) are much more difficult to value

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Valuethinker » Fri Feb 10, 2012 9:44 am

nisiprius wrote:Gee, if only there were some sort of bond whose principal wasn't a fixed nominal dollar value, but was, oh, I don't know, indexed to the CPI or something. Oh, I know what you'll say: "Dreamer! Get your head out of the clouds." Well, OK, but a fellow can wish.
The term you are looking for is 'Real Return Bonds' ;-).

You could also do a google on 'Treasury Inflation Tracking Securities' - they were proposed, but for strange political reasons, last minute changes were made ;-).

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by GregLee » Fri Feb 10, 2012 9:45 am

It's a fundamental principle of long term growth investing that you buy assets which you expect eventually to be worth more and you avoid holding assets which you expect eventually to be worth less. What does that tell Buffet, and what should it tell us about holding bonds? I don't see anything at all odd about what Buffet is quoted as saying in the article.
Greg, retired 8/10.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by magellan » Fri Feb 10, 2012 9:57 am

IMO, this topic would be more helpful without the attacks on the messenger, his motives, or his business acumen. Let's shift the focus to the content of his message:
Warren Buffett wrote:...we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.
Warren Buffett wrote: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.
Warren Buffett wrote: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.
Warren Buffett wrote: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.
Posters here often comment that they prefer to only take risk on the equity side and that bonds are their safe investments. IMO, this mindset represents a misunderstanding about the nature of investment risk. Nominal bonds may have relatively low volatility, but they are NOT safe investments when measured with the appropriate yardstick - their ability to reliably preserve or increase purchasing power over time. It's a plain fact that an asset class that lost a cumulative 40% of its real value from 1940 to 1980 is NOT a safe investment.

Personally, I think Mr. Buffett's focus on investment as deferring consumption now with the hope of being able to have more consumption later is key. For most investors, the relevant measure of investment performance is real after-tax return. Nominal returns are unimportant to investors saving for retirement. Will my portfolio's purchasing power increase over time? For me, this is Buffett's main point and I challenge anyone to find an error in his logic.

I don't think this means investors nearing retirement should move to 100% stocks. However, in today's climate of fear, especially fear of equity risk, it's good to be reminded that nominal bonds are risky too. Investors have a choice between a small but guaranteed loss of purchasing power with TIPS, or accepting significant risk with either stocks or nominal bonds.

Jim

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SPY vs Berkshire Hathaway

Post by StoneReader » Fri Feb 10, 2012 10:28 am

Who probably has the better insight? "The proof is in the pudding"

http://www.google.com/finance?chdnp=1&c ... K.A&ntsp=0

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Liquid » Fri Feb 10, 2012 10:31 am

magellan wrote:IMO, this topic would be more helpful without the attacks on the messenger, his motives, or his business acumen. Let's shift the focus to the

Posters here often comment that they prefer to only take risk on the equity side and that bonds are their safe investments. IMO, this mindset represents a misunderstanding about the nature of investment risk. Nominal bonds may have relatively low volatility, but they are NOT safe investments when measured with the appropriate yardstick - their ability to reliably preserve or increase purchasing power over time. It's a plain fact that an asset class that lost a cumulative 40% of its real value from 1940 to 1980 is NOT a safe investment.

Personally, I think Mr. Buffett's focus on investment as deferring consumption now with the hope of being able to have more consumption later is key. For most investors, the relevant measure of investment performance is real after-tax return. Nominal returns are unimportant to investors saving for retirement. Will my portfolio's purchasing power increase over time? For me, this is Buffett's main point and I challenge anyone to find an error in his logic.

I don't think this means investors nearing retirement should move to 100% stocks. However, in today's climate of fear, especially fear of equity risk, it's good to be reminded that nominal bonds are risky too. Investors have a choice between a small but guaranteed loss of purchasing power with TIPS, or accepting significant risk with either stocks or nominal bonds.

Jim
+1 Many seem to read the OP and not the actual article. Buffet does not suggest 100% stock for the individual investor or for his company. His points on the nature of investment and the nature of risk are interesting but "hidden" in the article.
Last edited by Liquid on Fri Feb 10, 2012 10:50 am, edited 1 time in total.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Valuethinker » Fri Feb 10, 2012 10:35 am

GregLee wrote:It's a fundamental principle of long term growth investing that you buy assets which you expect eventually to be worth more and you avoid holding assets which you expect eventually to be worth less. What does that tell Buffet, and what should it tell us about holding bonds? I don't see anything at all odd about what Buffet is quoted as saying in the article.

The principal of long term investing is you match your real assets to your real future liabilities.

Nominal instruments, like bonds and CDs, have a place in that. You do accept the risk of unexpected inflation.

Even if your expected return is positive, it could be negative given the probability dispersion of outcomes for any asset.

Only RRBs, in a tax exempt scenario, have no risk of a negative real return (if bought at a positive one, and coupons reinvested at a positive rate).

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by PreserveCapital » Fri Feb 10, 2012 2:34 pm

The_J wrote:
PreserveCapital wrote: An individual investing for retirement has far LESS ability to allocate 100% of investable assets to equities than does a 200 billion market cap corporation. You seem to have gotten the point bacwards.
Actually you have more ability to, because it's pretty simple for an individual to make a 100% allocation, but I know that's not what you mean. However, you seem to have completely missed my point. My point is that when you say something to the effect that Buffett doesn't believe what he's saying, or he doesn't put his money where his mouth is, based on the fact that Berkshire's capital is not 100% in equities, you're relying on the false premise that an individual investor and a multi-billion dollar corporation are similar. Because the two are so incredibly dissimilar, Buffett can believe that the correct course for the individual investor is entirely different than the correct course for the corporation.

Whether or not a 100% equities allocation (or something substantially close to that) is a good idea for an individual is a separate issue.
Since 99% of Buffett's personal net worth is represented by his ownership of approx. 1/3 Brk Hathaway shares, for all intents and purposes, its AA is HIS "personal" AA.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by PreserveCapital » Fri Feb 10, 2012 2:42 pm

Sam2 wrote:I agree with The_J. Buffet's time frame is infinite, but not Bogleheads. He likes to be in a spotlighte, but he has his conglomerate in mind not individuals.
There things he talks about, which is a contradiction to his previous statements, but I don't want to get into politics.

I admire Buffet as an investor, but as a person he is fallen from the sky.

It's very easy to misinterpret Buffett because he chooses his words carefully and people hear what they want to hear.

If you actually read the linked article Buffett makes it very clear that under no circumstances should an investor sacrifice "liquidity" and as a matter of fact the "only" thing that adequately provides iron clad liquidity is short term treasury bills.

Buffett is not telling anyone to invest their "liquidity" in the stock market. On the contrary--Buffett has often been quoted saying that an investor in equities should not care if the stock market is closed down for ten years.

So, if you can invest assets in equities without concern for what happens to price for ten years--go ahead, with Buffett's approval.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by PreserveCapital » Fri Feb 10, 2012 2:48 pm

Valuethinker wrote:
PreserveCapital wrote:Now I'm not sure how wholly-owned companies are accounted for here, they're probably separate. But in terms of asset allocation among equities, bonds, and cash, BRK has, according to the article, as of 9/30/2011:

68 billion equities

34 billion fixed income

34.8 billion cash



The most fascinating thing about the article is that Buffett distinctly seems to be giving some very strong advice for individual investors to go 100% equities but then when you actually see the breakdown of his company's portfolio, it's not really that way at all.
Quite distorted though:

- BH is one of the world's largest insurance companies, they hold cash and bonds against those policies-- the gross picture is not very helpful

- BH does publish its own estimate of 'book value' of its equities, which is significantly greater than what is in the accounting rules Book Value. Which is the above being quoted? It's easy to value its quoted equity holdings, but its unquoted holdings (eg Netjet, railways, utilities) are much more difficult to value

Nope you're wrong on both counts.

When BRK purchased Gen Re in 1998 when its share were arguably overpriced, it was in essence exchanging its pricey equity for Gen Re's undervalued bond portfolio in a tax free transaction.

And bonds are bonds are bonds. They are part of the company's, and hence Buffett's, allocation. They don't "not count" just because they're held within an insurance company. Insurance companies DELIBERATELY hold lots of fixed income BECAUSE THEY ARE SAFER THAN EQUITIES. THAT'S THE POINT!!!!!!

As to point two, marketable securities ARE MARKED TO MARKET. Book value of the equities are their market value. It's the wholly owned subsidiaries, not the equities held, for which book severely understates intrinsic value.

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Re: SPY vs Berkshire Hathaway

Post by PreserveCapital » Fri Feb 10, 2012 2:53 pm

StoneReader wrote:Who probably has the better insight? "The proof is in the pudding"

http://www.google.com/finance?chdnp=1&c ... K.A&ntsp=0
And funnily enough, for most of that period of out performance w/r/t S&P 500, Brk has ALWAYS held a very healthy proportion of cash/fixed income in its overall portfolio.

So what conclusion can be drawn from that?

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Avoid a wrong conclusion

Post by Taylor Larimore » Fri Feb 10, 2012 3:05 pm

Bogleheads:

[quote]“They are among the most dangerous of assets,” Mr. Buffett said in an adaptation of his annual letter to shareholders that appeared today on Fortune magazine’s website.[/quote]

I rarely have the audacity to question anything Warren Buffett writes, but this time I feel I am on safe grounds.

It should be obvious that bonds are not "the most dangerous of assets." Bonds are much safer than stocks, limited partnerships, unit trusts, commodities, futures, index options, CMOs, etc. During the Great Depression when the Dow lost -89%, 5-year Treasury bonds actually made money.

We must not draw wrong conclusions even from experts who were probably misquoted or taken out of context.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by umfundi » Fri Feb 10, 2012 3:19 pm

nisiprius wrote:Gee, if only there were some sort of bond whose principal wasn't a fixed nominal dollar value, but was, oh, I don't know, indexed to the CPI or something. Oh, I know what you'll say: "Dreamer! Get your head out of the clouds." Well, OK, but a fellow can wish.
Well, back in the 1980's, my salary was like that, indexed to inflation.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Prudent Saver » Sat Feb 11, 2012 1:59 am

pinebarrens1 wrote:early in 2011, Buffet said treasuries are the last place you want to be. Long term treasuries went on to return 30+ percent in 2011. So Buffett was completely wrong.

for an alternate view on treasuries going foward, see this video

http://www.youtube.com/watch?v=65NXbnfNDBU

I echo the prior poster who already brought up the fact that Buffett has never claimed to be able to predict the future. He readily acknowledges that he doesn't know what the market is going to do over the next year, but over longer periods it is pretty easy to see relationships and patterns. It's from this perspective that he makes his comments.

And keep in mind, you only capture that 30+ percent gain if you sell. And then if you sell, what do you do with the proceeds? Repurchase the same bond?

The simple fact is, a treasury bond will never return more to you than the coupons + par. Ever. It may present an opportunity to sell and get a capital gain if rates fall from the yield at which you purchased, but I ask again, what do you do with the proceeds? You'd be buying back in at the same price you sold at, returning you back to the bond conundrum of coupons + par.

With stocks, you own a portion of productive assets that provides the possibility of earnings and dividend growth. And this is why stocks have always (Yes, always Nisiprius) returned more than bonds over 30 year time periods. The term "fixed" in fixed income isn't window dressing. It has actual meaning. And at current valuations, it has very expensive implications for the long term investor.
Be greedy when others are fearful, and fearful when others are greedy.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by HardKnocker » Sat Feb 11, 2012 9:29 am

“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by mcblum » Sat Feb 11, 2012 9:37 am

This is all driving me nuts. I recently went from 50/50 to 40% stock/60% bonds because of my age (68) and my horizon of six more years before retirement;
My portfolio is modest and i wouldn't want a big down turn near the end. I do carry a small (6%) amount of TIPS but this doesn't seem to be enough. Help!!
Marty

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by HardKnocker » Sat Feb 11, 2012 9:40 am

mcblum wrote:This is all driving me nuts. I recently went from 50/50 to 40% stock/60% bonds because of my age (68) and my horizon of six more years before retirement;
My portfolio is modest and i wouldn't want a big down turn near the end. I do carry a small (6%) amount of TIPS but this doesn't seem to be enough. Help!!
Marty
Relax. Don't make any sudden moves. Read the above article about John Bogle.

Control your emotions. Refuse to panic.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by htdrag11 » Sat Feb 11, 2012 9:58 am

stemikger wrote:
htdrag11 wrote:I consider both Buffett and Fink are "pump and dump" charlatans, each with his own agenda and both are disingenuous.

Buffett can get sweetheart deals where none of us can negotiate. His past records are just his past records, not a forward looking trend. Putting 100% in equities is not quite the Bogle way.
This is just silly and not accurate.
Please enlighten me.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by magellan » Sat Feb 11, 2012 12:13 pm

mcblum wrote:This is all driving me nuts. I recently went from 50/50 to 40% stock/60% bonds because of my age (68) and my horizon of six more years before retirement;
My portfolio is modest and i wouldn't want a big down turn near the end. I do carry a small (6%) amount of TIPS but this doesn't seem to be enough. Help!!
If you're feeling fear as you read this thread and are considering short-term changes because of it, please use caution. Your allocations seem entirely sensible to me and the difference in results between 50/50 and 60/40 is likely to be very small.

Intellectual curiosity is one thing, but fear and greed tend to produce terrible investment decisions. Perhaps this thread may plant some seeds that you eventually act on down the road. Maybe you'll use more TIPS, or maybe you'll shorten the duration of your bond holdings. Who knows what's best. There are no right answers, but plenty of wrong answers and wrong approaches.

My personal rule for a big change is to let an idea simmer for at least 6 to 12 months before taking action. Once I decide on a change, I mark on a calendar the date the change becomes 'actionable'. Then I wait. If I still think it's wise to move forward after the waiting period, I usually make the change in chunks over 6-12 months to ensure I don't get cold feet or buyer's remorse. In the last decade, I can count on one hand the number of changes that have made it through this gauntlet.

There's no scientific proof that my approach is superior or even smart, but it's based on knowing myself and what works for me. My rule helps me avoid making dumb short-term changes out of fear or greed and forces me to steer my portfolio like a large ocean-liner instead of a nimble speed boat. I think that helps me.

Jim

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by The_J » Sat Feb 11, 2012 2:19 pm

PreserveCapital wrote:
The_J wrote:
PreserveCapital wrote: An individual investing for retirement has far LESS ability to allocate 100% of investable assets to equities than does a 200 billion market cap corporation. You seem to have gotten the point bacwards.
Actually you have more ability to, because it's pretty simple for an individual to make a 100% allocation, but I know that's not what you mean. However, you seem to have completely missed my point. My point is that when you say something to the effect that Buffett doesn't believe what he's saying, or he doesn't put his money where his mouth is, based on the fact that Berkshire's capital is not 100% in equities, you're relying on the false premise that an individual investor and a multi-billion dollar corporation are similar. Because the two are so incredibly dissimilar, Buffett can believe that the correct course for the individual investor is entirely different than the correct course for the corporation.

Whether or not a 100% equities allocation (or something substantially close to that) is a good idea for an individual is a separate issue.
Since 99% of Buffett's personal net worth is represented by his ownership of approx. 1/3 Brk Hathaway shares, for all intents and purposes, its AA is HIS "personal" AA.
Then Buffett is 99% in equities. If you're going to use the asset allocation of a stock holding to determine the asset allocation of the stock holder, do you know the asset allocation for every company in every index/mutual fund you own in order to determine what YOUR asset allocation is? Buffett may be 99% in Berkshire Hathaway, but Berkshire Hathaway isn't 99% in Buffett.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by Mudpuppy » Sat Feb 11, 2012 4:46 pm

mcblum wrote:This is all driving me nuts. I recently went from 50/50 to 40% stock/60% bonds because of my age (68) and my horizon of six more years before retirement;
My portfolio is modest and i wouldn't want a big down turn near the end. I do carry a small (6%) amount of TIPS but this doesn't seem to be enough. Help!!
Marty
You're fine. If you read the full Buffett newsletter, instead of the media articles with select quotes, you'll see that Buffett is mostly irked that bonds produce very little post-inflation/post-taxes returns. He's looking for products that grow over time, and certainly stocks have a higher likelihood of growing over the long-term, but they also have a higher likelihood of loss.

You want to avoid losses while still holding on to your current purchasing power. Bonds are perfectly fine for that. Buffett wants growth, you want stability. Those are two totally different investing motivations, so ignore what Buffett says.

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Re: Buffett Says Bonds Among Most Dangerous Assets on Inflat

Post by PreserveCapital » Sat Feb 11, 2012 4:59 pm

The_J wrote:
PreserveCapital wrote:
The_J wrote:
PreserveCapital wrote: An individual investing for retirement has far LESS ability to allocate 100% of investable assets to equities than does a 200 billion market cap corporation. You seem to have gotten the point bacwards.
Actually you have more ability to, because it's pretty simple for an individual to make a 100% allocation, but I know that's not what you mean. However, you seem to have completely missed my point. My point is that when you say something to the effect that Buffett doesn't believe what he's saying, or he doesn't put his money where his mouth is, based on the fact that Berkshire's capital is not 100% in equities, you're relying on the false premise that an individual investor and a multi-billion dollar corporation are similar. Because the two are so incredibly dissimilar, Buffett can believe that the correct course for the individual investor is entirely different than the correct course for the corporation.

Whether or not a 100% equities allocation (or something substantially close to that) is a good idea for an individual is a separate issue.
Since 99% of Buffett's personal net worth is represented by his ownership of approx. 1/3 Brk Hathaway shares, for all intents and purposes, its AA is HIS "personal" AA.
Then Buffett is 99% in equities. If you're going to use the asset allocation of a stock holding to determine the asset allocation of the stock holder, do you know the asset allocation for every company in every index/mutual fund you own in order to determine what YOUR asset allocation is? Buffett may be 99% in Berkshire Hathaway, but Berkshire Hathaway isn't 99% in Buffett.
You're wrong again (obviously). You seem to not want to actually look at the facts. Arguing for the sake of arguing, as you appear to be doing, is unenlightening.

Warren Buffett is the CEO of Berkshire Hathaway. He has a huge amount of control over its composition, including its internal AA.

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