Warren Buffett: Why stocks beat gold and bonds

[Clive]

...

[Ad Orientem]

Clive,
Interesting article and thanks for posting.  Brother Buffet of course is a well known gold bear of long standing.  What he neglects to note is the cyclical nature of the movement in prices for various asset classes.  Gold has sharply outperformed stocks for two of the last four decades and dramatically underperformed for the other two.  His argument that stocks make a better long term investment may have some validity, but it has two distinct weak points.  First, not everyone has a 1965-2012 type investment horizon.  Point in fact very few people likely do.  And secondly stocks (like gold) as a stand alone asset class, are incredibly volatile and can go through very long periods of low or even negative returns.  Not many people outside of the much maligned 1% can endure that kind of volatility and potential negative returns.  If I were independently wealthy and able to handle the sharper volatility, I might add some weight to equities (my investment horizon is still over 20 yrs) and maybe tone down the cash portion of the portfolio and maybe even shave 5% off the gold.  But history has shown gold is still the best asset class to be in in a high inflation environment.  On which note Buffet, to his credit, does seem to grasp the risks of the fiat money system that currently underpins the world's economy.

[moda0306]

Ad,

I think Buffett's attitude towards bonds is just as naive as his attitude towards gold.

LTT's have done a masterful job of protecting us in the past 10 years against the stock market's drops.  I don't look at the bond market by itself, which obviously has a ton of risks, but when wondering what investment you should hold that properly hedges the variable returns of a private player in the economy, a long-term fixed payment from the most stable entity in the world would seem like an excellent choice.

I know I'm probably preaching to the choir, but I find his attitude towards bonds to be just as annoying as his opinion of gold.  He's not "grasping" anything about bonds other than the obvious... that they "might lag inflation."  Gold also has the negatives of being the football in a giant game of Greater Fools.  Those are the negatives, and he seems to have zero grasp of the positives of either one.

[FarmerD]

From http://www.bloomberg.com/news/2012-02-0 ... ation.html it looks like WB asset allocates something like

$68B in equities (stocks)
$34B in fixed income (government debt, corporate bonds and mortgage-backed securities)
$34B in cash

Putting aside the contradiction of bonds, if instead of gold he looks to domestic currency hedge using alternatives such as farmland - or perhaps Forestry and Land, against half of the $64B equities then ...

Land : http://www.recap.iastate.edu/atlas/farm ... type=excel (linked from http://www.recap.iastate.edu/atlas/farm ... values.php)

Forestry : http://www.htrg.com/pdf/rn_returns_02.pdf

it's not too dissimilar to a PP type asset allocation in some respects, and the Land and Forestry historic figures recorded in the above links indicate some impressive hedging and gains.

Thanks for the links Clive.  For some reason, the state ag extension agencies only seem to be able to give me bits and pieces of historical data to work with.  If I'm able to put together a composite yearly farmland price for Iowa and Nebraska, I'll post. 

[stone]

Buffet also bought Brazilian Real treasuries at the end of the 1990s. If you look at those with interest compounded, they protected against USD devaluation in a way analogous (but obviously in many ways different) to gold. He clearly spotted the issue that gold has dealt with, only he chose a different saving vehicle to deal with it.

[shoestring]

Buffett is at once a joy and an a enigma to read.  For instance it's refreshing that he admits openly that it's generally best to just buy an index fund, on the other hand his letters to shareholders indicate how smart they are for investing in BRKA.  He makes a sincere, if illogical, plea to aid the common man's wallet through tax reform, yet he deliberately prices his own company's shares such that only the elite can afford them (at least until the advent of BRKB).  And so on, and so on.

But I would submit that the Oracle's charm is that despite his guffaws, he is internally consistent and possesses at least some degree of horse sense so many people in his position seem to lack utterly.  I don't agree with everything he says, not by a long shot, but he's a very wealthy person who seems relatable to me unlike some professional entertainers, for example.

From that perspective, I can't actually fault this article because Buffett's approach is he is the ultimate buy and hold investor, at least in theory if not execution.  He is the man who is quoted as saying the correct holding period for stocks is forever.

From the perspective of a man who wishes to create, to the best of his ability, an entity which is immortal and timeless, with a time frame of centuries, investing mostly in equity does make a great degree of sense.

If you think about the four economic climates the PP addresses, the only one that's really sustainable when it comes right down to it is Prosperity.  Now Prosperity can pull Inflation (for example) along for the ride, but ultimately deflation, etc. must end.  A negative economic climate may only end when the state where it occurs dissolves and there's a regime change, but it will end.  It may only end after decades or centuries, but it will end.

The problem I see is that individual people are not companies, or universities, or any other such thing that will endure for longer than a human lifespan.  Most of us hope to accumulate, then anticipate gradually spending it all down until we eventually die and just hope we live for only as much time as we have funds.  Our time frame is relatively short, and so our needs are very different.

From his perspective as manager of a company, I don't really disagree with him, but when it comes ot what people should do to protect themsleves that's a different matter entirely.

[Lone Wolf]

Now Prosperity can pull Inflation (for example) along for the ride, but ultimately deflation, etc. must end.

Gentle deflation can actually carry on for quite a long time.  The first 150 years of the United States were a net deflationary period.  To be fair, these periods of time did contain the massive inflation of the Civil War, etc. but it does show that deflation can also "ride along" with prosperity for a great deal of time.

In the modern fiat "let's print it up" world, of course, I don't exactly expect to see quite so much of this. 

The problem I see is that individual people are not companies, or universities, or any other such thing that will endure for longer than a human lifespan.  Most of us hope to accumulate, then anticipate gradually spending it all down until we eventually die and just hope we live for only as much time as we have funds.  Our time frame is relatively short, and so our needs are very different.

That's right.  It can be very hard to outlast some of these little downward blips in the markets that may "only" last a few decades.  Japanese-style 25 year sideways-n-down slides are a terrible thing to handle.  On some timescales that's the blink of an eye.  But if you're a Japanese investor who started investing at age 25, it's a frightful thing to experience all the way into your 50s.

[MediumTex]

If you think about the four economic climates the PP addresses, the only one that's really sustainable when it comes right down to it is Prosperity.  Now Prosperity can pull Inflation (for example) along for the ride, but ultimately deflation, etc. must end.  A negative economic climate may only end when the state where it occurs dissolves and there's a regime change, but it will end.  It may only end after decades or centuries, but it will end.

Couldn't you say the same thing about prosperity?

If you had known in the year 1,000 what we know today, would you have been willing to bet on prosperity as the only really sustainable economic climate for the next 1,000 years?  It seems to me that such a bet would have left you broke many times as famine, disease and military aggression repeatedly destroyed pockets of prosperity around the world.

In modern times, do you think that an investor in Rhodesia, Lebanon or Cuba would agree with your comments about prosperity being the only sustainable economic climate?  Such a belief in those economies would have led an investor in the last 50 years to have suffered near total losses. 

The problem I see is that individual people are not companies, or universities, or any other such thing that will endure for longer than a human lifespan.  Most of us hope to accumulate, then anticipate gradually spending it all down until we eventually die and just hope we live for only as much time as we have funds.  Our time frame is relatively short, and so our needs are very different.

It is a rare company that lasts longer than a human lifetime.  I would say perhaps 1 out of 20 large companies last that long, and perhaps 1 out of 100 small companies.

[MediumTex]

Warren Buffett is one of the largest precious metals speculators in modern times.

In 1998 he accumulated a silver position that eventually reached over $600 million dollars at a price of $5 an ounce and was thought to represent a fifth of the world supply of silver at that time. 

He later sold out of his position at around $7 an ounce.  If he had maintained his position from 1998 to 2011, he would have seen a "10 bagger" on his silver investment and this performance alone could have prevented BRK's basically sideways movement in recent years.  In other words, Buffett's precious metals play was good, but it could have been one of the great trades of all time if managed more prudently.

Thus, Buffett says one thing but does another when it comes to investing/speculating in precious metals, and his theory that precious metals can't match the returns offered by stocks is invalidated by his own silver investment that could have helped buoy his whole company in recent years as Buffett's stock picking ability wasn't able to keep BRK from drifting sideways and down with the rest of the market.

I love Warren Buffett, but the argument he is trying to make doesn't really make any sense.  When stocks are performing well, they perform very well, and when they are performing poorly other asset classes are needed to prop things up until stocks begin performing well again.

[stone]

You can fondle the cube, but it will not respond.

He's fun with all of this but it is just fun and doesn't make a lot of sense IMO. Rather than talking about being able to fit all of the gold into a 60m by 60m by 60m cube or whatever he might as well have said that all of the $15T worth of US treasuries and bank reserves could be downloaded from the Fed's computer onto a memory stick. Those few lines of code or whatever they are could buy you 32 Exxons, all the farmland in the USA and Canada and Brazil and then you would have $2T of walking around money left over. That trumps the cube any day.

[alvinroast]

Warren Buffett is one of the largest precious metals speculators in modern times.

In 1998 he accumulated a silver position that eventually reached over $600 million dollars at a price of $5 an ounce and was thought to represent a fifth of the world supply of silver at that time. 

He later sold out of his position at around $7 an ounce.  If he had maintained his position from 1998 to 2011, he would have seen a "10 bagger" on his silver investment and this performance alone could have prevented BRK's basically sideways movement in recent years.  In other words, Buffett's precious metals play was good, but it could have been one of the great trades of all time if managed more prudently.

Thus, Buffett says one thing but does another when it comes to investing/speculating in precious metals, and his theory that precious metals can't match the returns offered by stocks is invalidated by his own silver investment that could have helped buoy his whole company in recent years as Buffett's stock picking ability wasn't able to keep BRK from drifting sideways and down with the rest of the market.

I love Warren Buffett, but the argument he is trying to make doesn't really make any sense.  When stocks are performing well, they perform very well, and when they are performing poorly other asset classes are needed to prop things up until stocks begin performing well again.

Well said. I've been re-reading several HB books after many years of collecting dust and I'm constantly struck by not only his eloquently simple PP, but also by what a great writer he is and how he anticipates the objections of readers. I'm looking forward to the upcoming book. The style of writing of both you and craigr fits very well with HB's writing.

As for Warren Buffet, I'll just leave this link here in case you haven't seen it:
http://www.youtube.com/watch?feature=pl ... BKwTSBBn7U

[stone]

Clive, isn't a big part of the point of gold to link into a fully global market? Does for instance increasing purchasing power for people in India translate as smoothly into forestry or farm land prices as it does for gold? To my mind UK farmland looks to be priced based on what farm subsidies and tax breaks are available because those are behind so much of the returns from UK farmland. That seems more a function of UK politics than a pure global play.

[Ad Orientem]

Hi Clive
Given your emphasis on currency diversification would it be reasonable to infer you are more favorable to the asset allocation in PRPFX, which in addition to gold and silver holds 10% in Swiss Francs, than the 4 x 25% PP?

[FarmerD]

Iowa land price history seems quite average compared to other states and assuming you could earn 3% income from that land then compared to gold since 1972

Clive your knowledge is encyclopedic - thanks for the info.  I'm curious where you get the assumption you could earn 3% income from farmland.  The past few years have been exceptionally good for corn farmers - I'd estimate you would have earned 6-7% income over this timeframe.  I have no idea what % would have been earned in years past.  I have found some data I can use to extrapolate farm rental income from the following sites:

Rent share farming agreements
http://www.drylandfarming.org/Farming%2 ... rming.html

Historical corn prices since 1960
http://www.farmdoc.illinois.edu/manage/ ... SPrice.asp

Corn yields
http://www.extension.iastate.edu/agdm/c ... /a1-12.pdf
http://www.agr.state.il.us/about/history/histcrop.html
http://www.ers.usda.gov/AmberWaves/Dece ... Yields.htm

Rental income (%) can be calculated by

[crop yield (bu/acre) X Crop price ($/bu) X rent share percentage]/Current value of the acreage

If you have any data on yearly farming rental income this would save me from embarking on this (rather lengthy) project.  

[Gumby]

This is all just part of a long line of Warren Buffet advertorials getting people to buy Berkshire Hathaway.

Here's what he's really saying....

"Stocks beat gold and bonds, (so buy Berkshire Hathaway)"

Add this to my running list of Warren Buffet quotes...

Buffett Says Don't buy Long Term Bonds (so buy Berkshire Hathaway)
Buffett Says U.S. Housing May Not Recover in 2011 (so buy Berkshire Hathaway)
Buffett Says European Banks Have Asked Him For Money (so buy Berkshire Hathaway)
Buffett Says 'Bet Heavily' Against Double-Dip Recession (so buy Berkshire Hathaway)
Buffett Says the Economy Will Recover (so buy Berkshire Hathaway)
Buffett says Berkshire has begun share buybacks (so buy Berkshire Hathaway)
Buffett says he remains optimistic about U.S. future (so buy Berkshire Hathaway)

You can add the words "so buy Berkshire Hathaway" to the end of almost any sentence Buffet says.

[shoestring]

Couldn't you say the same thing about prosperity?

If you had known in the year 1,000 what we know today, would you have been willing to bet on prosperity as the only really sustainable economic climate for the next 1,000 years?  It seems to me that such a bet would have left you broke many times as famine, disease and military aggression repeatedly destroyed pockets of prosperity around the world.

Ah, but 1000 years ago, I wouldn't be sitting here reading your counterpoint via this magical electrobox.  I would in fact submit that most people on the planet, despite the fact they're not stupid rich like we are in North America, Europe and other choice spots, are better off than they were 1000 years ago.  Empires rise and crumble, this is true, and your ownership could be lost in the shuffle.  But Prosperity is still our tendency.

In modern times, do you think that an investor in Rhodesia, Lebanon or Cuba would agree with your comments about prosperity being the only sustainable economic climate?  Such a belief in those economies would have led an investor in the last 50 years to have suffered near total losses. 

What I said below.

The problem I see is that individual people are not companies, or universities, or any other such thing that will endure for longer than a human lifespan.  Most of us hope to accumulate, then anticipate gradually spending it all down until we eventually die and just hope we live for only as much time as we have funds.  Our time frame is relatively short, and so our needs are very different.

It is a rare company that lasts longer than a human lifetime.  I would say perhaps 1 out of 20 large companies last that long, and perhaps 1 out of 100 small companies.

[/quote]

Ths is true, but it does not mean that all that equity goes away, the progress we made tends to move forward.  The people who made barber poles switch to making neon signs, the ice man gets a job delivering packages instead, etc.

That said, I prepare most of my meals on 70+ year old cast iron of such quality that nothing comparable is made today so it's not perfect.

I'll put it another way.  I believe that for any finite time span, be it 5 seconds or 5 milleniums, we can argue that any economy is zero sum.  There's only so much produced in a given time span so in that time span the more you take the less there is for others.  But for an infinite or indefinite time span, I do not believe that is true.  I believe more wealth and value are created over time, spanning companies, empires and most of human history.

The political entities, currencies and indebtedness of 4000 years ago may be gone, but we still know how to make clay pots.

[MediumTex]

shoestring,

I agree that if you wait long enough, the arc of human history suggests that prosperity will return sooner or later.

For some people, though, they don't have the luxury of waiting that long.  In another post I cited Rhodesia (Zimbabwe now), Lebanon and Cuba as examples of places where prosperity as we think of it has gone into hibernation for the last few decades.  Most investors can't wait that long for prosperity to return.

Also, even if we are certain that prosperity will return we still need insurance against periods when it is not present, just as we need insurance against bad weather even though the weather may be pleasant most of the time.

As I read history what I see time and again is that there will be episodes of war, famine, and other natural and manmade disasters in between periods of prosperity.  Even if these are usually short-lived episodes, they still have a way of wiping out the wealth of many individuals who essentially owned the wrong assets at the wrong time.  I think that it's important for an individual to protect himself from this sort of thing as much as he can.

[cabronjames]

shoestring,

I agree that if you wait long enough, the arc of human history suggests that prosperity will return sooner or later.

For some people, though, they don't have the luxury of waiting that long.  In another post I cited Rhodesia (Zimbabwe now), Lebanon and Cuba as examples of places where prosperity as we think of it has gone into hibernation for the last few decades.  Most investors can't wait that long for prosperity to return.

perhaps the "dark ages" in the geo area now called Italy is an example of how prosperity can "hibernate".  Between the Roman Empire falling ~500AD & the Renaissance ~1500, that's possibly 1000 yrs of non-prosperity, at least relative to the prior levels of the Roman Empire state!  Might a Roman that got into a DeLorean time machine to today say "what are these whiny Japanese complaining about with their mere 23 yr declining stock market since 1989!".

[MediumTex]

shoestring,

I agree that if you wait long enough, the arc of human history suggests that prosperity will return sooner or later.

For some people, though, they don't have the luxury of waiting that long.  In another post I cited Rhodesia (Zimbabwe now), Lebanon and Cuba as examples of places where prosperity as we think of it has gone into hibernation for the last few decades.  Most investors can't wait that long for prosperity to return.

perhaps the "dark ages" in the geo area now called Italy is an example of how prosperity can "hibernate".  Between the Roman Empire falling ~500AD & the Renaissance ~1500, that's possibly 1000 yrs of non-prosperity, at least relative to the prior levels of the Roman Empire state!  Might a Roman that got into a DeLorean time machine to today say "what are these whiny Japanese complaining about with their mere 23 yr declining stock market since 1989!".

If we were on the cusp of a new Dark Ages today, imagine trying to cheer up a Japanese equity investor by saying: "Well, only 977 more years and stocks are going to start rocking again; remember, prosperity always returns eventually."