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Buffett: Bonds the Most Dangerous of Assets
Old 02-09-2012, 11:01 AM   #1
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Buffett: Bonds the Most Dangerous of Assets

At 52:39:9 it makes my head spin...but I know there are many on all sides of the bond debate these days. I also realize what BRK holds shouldn't resemble an individual investors AA.
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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: Why stocks beat gold and bonds - The Term Sheet: Fortune's deals blog Term Sheet
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Old 02-09-2012, 01:04 PM   #2
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This is what I've been trying to articulate for awhile now about bonds.

Buffett does a much better job of explaining the risk people are taking withoug knowing it.

I love his example of pulling all the gold in the world into one spot and investing in it.
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Old 02-09-2012, 01:36 PM   #3
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Good stuff. Thanks for posting.
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Old 02-09-2012, 02:05 PM   #4
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That was a good read. Thanks for posting.

I did have a funny thought at the end. BRKA and other stocks that never pay a dividend is a bit like gold in a sense. If you can *never* access the profits of the company whose equity you own then isn't that in some ways similar?
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Old 02-09-2012, 02:38 PM   #5
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That was a good read. Thanks for posting.

I did have a funny thought at the end. BRKA and other stocks that never pay a dividend is a bit like gold in a sense. If you can *never* access the profits of the company whose equity you own then isn't that in some ways similar?

Well yes and no. Mostly because there is a big difference between a stock which is not currently paying a dividend like Apple or Berkshire (paid a dividend once) and stock which will never pay a dividend. Which to me are mostly stocks which are about to go bankrupt. I put both Apple and Berkshire in to the camp that will eventually pay a dividend. In the case of Apple much of the speculation is this year. In the case of Berkshire I'd say it is probably a year after Warren steps aside or dies (equal money on him leaving the company feet first or voluntarily).

Jobs and Buffett were/are exceptional businessman and they both felt, not without justification, that they could do a better job making more money keeping it in the the company rather than returning it to stockholders.
I am pretty sure that their predecessors will look at the mountain of cash the companies have and say, "that is way more than I think I can profitably invest, might as well make the shareholders happy."
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Old 02-09-2012, 02:49 PM   #6
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Though I agree strongly with Buffett about the cost of taxes orignating from inflation, Buffett is downplaying the risk of loss of principal of stocks. Regardless of size or industry, no company is immune from disappearing. The bluest of blue chips will eventually get supplanted, sometimes with little warning.

Buffett mentions XOM. If tommorow someone invents inexpensive desktop fusion power, XOM's stock will collapse. A recent example of a venerable company becoming obsolete is Kodak.
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Old 02-09-2012, 03:06 PM   #7
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Though I agree strongly with Buffett about the cost of taxes orignating from inflation, Buffett is downplaying the risk of loss of principal of stocks. Regardless of size or industry, no company is immune from disappearing. The bluest of blue chips will eventually get supplanted, sometimes with little warning.

Buffett mentions XOM. If tommorow someone invents inexpensive desktop fusion power, XOM's stock will collapse. A recent example of a venerable company becoming obsolete is Kodak.

That is true, but Buffett advocates that most investor use index funds. So while XOM and most energy companies would be devastated by the news, the much large number of energy consuming companies, including Berkshire would be helped. Imagine the boom to Detroit being able to make big cars with basically free fuel, same thing with airlines and Boeing. In aggregate it would have a positive impact on stocks.

The impact on bonds would modest energy company bonds would be hurt, while struggling airline companies bond would be helped and the big cube of gold would be unchanged.
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Old 02-09-2012, 03:51 PM   #8
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What a clear image Buffet presents for investing. Now, what will I do with my wheelbarrow full of gold and silver coins?
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Old 02-09-2012, 03:54 PM   #9
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That is true, but Buffett advocates that most investor use index funds. So while XOM and most energy companies would be devastated by the news, the much large number of energy consuming companies, including Berkshire would be helped. Imagine the boom to Detroit being able to make big cars with basically free fuel, same thing with airlines and Boeing. In aggregate it would have a positive impact on stocks.

The impact on bonds would modest energy company bonds would be hurt, while struggling airline companies bond would be helped and the big cube of gold would be unchanged.
Don't know about anyone else, but I don't think anything would help airline stocks. Last time I bought any was Pan Am.
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Old 02-09-2012, 04:11 PM   #10
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Don't know about anyone else, but I don't think anything would help airline stocks. Last time I bought any was Pan Am.
Of the many things I like about Mr Buffet I think my favorite is that he never gives plans to 2 significant digits.

He knows that mainly you just have to be on the right side of the moon, know Shinola from that other stuff, and have the courage of your convictions.

I think his recommending index funds is just elaborate CYA. It would be hard to read his materials and think that his ideas point to index funds.

Ha
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Old 02-09-2012, 04:16 PM   #11
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I don't disagree with anything the Oracle said in his piece. However, here is a statement from the article that sort of sums up my ambivalence with a larger commitment to equities (in preference to "cash equivalents" and - for the sake of argument - gold).

"I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined."

Absolutely true, but the definition of "extended period" is a little vague to those of us in our mid 60s. I made a ton of money on equities - enough to insure my current "lavish" life-style. BUT, it was over one 10-year period when all my equity investing (of the 70s and 80s) finally paid off in the 90s. Since that time (yeah, I bailed out for the most part) equities have more-or-less gone sideways. Yes, dividends have helped (and I have participated). But, to be "certain" you will come out ahead on equities, you do need that "extended period" as a time frame. I'd like to think I have another 30 years of life, but realistically, it's more likely in the 15 to 20 year range (or less).

Could a long bull market start tomorrow. Yes. Could the "sideways" market continue for the nest 15 or 20 years. Yes.

Again, not arguing with WB. I'm simply suggesting that those of us with relatively shorter time-frames might be forgiven for trimming our equity positions somewhat - and in favor of such unproductive investments as gold or "cash" or bonds. Not suggesting NO equities, just suggesting (for me) far less equities than most of the rules-of-thumb would suggest.

Now, if one of us old codgers doesn't have enough "cash" or gold or bonds to weather an extended period of modest inflation and "sideways" returns, equities are probably the only alternative. If that is one's choice, one needs to consider the effects of beta. Personally, I saved MORE than I needed (based on the more typical 75/25 balance). Now, if I pay the price by losing some purchasing power, it will be sad but not tragic.

Hyper inflation would destroy those of us with lots of cash, but it's not clear that equities would fare better. Equities typically do well with modest inflation, but not with high inflation (think "stagflation" of the late 70s, early 80s). Probably, gold would be worth less, but never zero. And ITSHTF, gold may (or may not) be a crisis investment worth having. Piles of paper, bonds, stocks or cash probably will NOT have much value then.

So while acknowledging the "truth" that WB has laid out, I personally don't believe it's the whole story - at least not for all of us. Just sayin'... and YMMV.
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Old 02-09-2012, 04:25 PM   #12
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Don't know about anyone else, but I don't think anything would help airline stocks. Last time I bought any was Pan Am.
Yesterday, I was rummaging through things to throw away, and I came across a 1987 newspaper. Back then they had airfare prices in paper since the internet wasnt readily available then. I was looking at the prices and they werent that appreciably different than today. I was very surprised at least on the "sale" prices.
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Old 02-09-2012, 05:26 PM   #13
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Thanks for posting.

If I had to put all my money into one asset class it would be equities. However, we don't have to invest on that basis and other asset classes bring three potential benefits to a portfolio:

1. Reduced volatility (or risk if you prefer)
2. Rebalancing opportunities
3. A safe haven for market timers who think that equities are overvalued
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Old 02-09-2012, 05:50 PM   #14
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Just a day or two ago, I saw someone from Black Rock, an investment firm which was said to have 1 trillion under management, recommended 100% equities.

I am at 70% equities right now, and quite a bit in cyclical stocks. Been thinking about putting more into equities, perhaps another 10 to 15%, but into stodgy dividend stocks. Of course being a market timer that I am, I have not done so, but have been licking my chops watching these dividend stocks inching down from their high of last year.
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Old 02-09-2012, 06:00 PM   #15
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The argument for stocks always uses unrealistic investment periods of 50 years or more. Ridiculous. To say bonds are inferior investments ignores the experience of the largest group of investors in history, the baby boomers. Buffet only makes 100k a year and at his advanced age still isn't retired. Why would anyone take his advice? lol
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Old 02-09-2012, 06:10 PM   #16
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Buffet only makes 100k a year and at his advanced age still isn't retired. Why would anyone take his advice? lol
Yes, and as Berkshire does not pay dividend, I'd bet he has been dipping into principal for living expenses.
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Old 02-09-2012, 06:31 PM   #17
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Yes, and as Berkshire does not pay dividend, I'd bet he has been dipping into principal for living expenses.
His AGI last year was 63 million with a taxable income of 39 million (after deductions for his donation to the Gates and kids foundations). He collect plenty of dividends from other companies.
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Old 02-09-2012, 06:33 PM   #18
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Whoa! Thanks for info. I do not follow Buffet closely, and thought he invested solely in Berkshire.

By the way, my joke was implying that with Buffet's principal, who cares about dividends?
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Old 02-09-2012, 07:03 PM   #19
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It is hard to argue with WB. He is a very smart man with the best investment acumen. I do not think that most of us have such sharpness of intellect to do the things he does in equities.

For me, I rather be "diversified" and reduce the risk a little or I should say
spread it out. I know my returns will dilute but that's what I can handle.

Stocks as a rule also goes in "cycles", some short, some very long. Some of us may not have the time for the rebound, and or may be stucked for a long time.

I rather avoid absolute statements since we cannot really predict the future.
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Old 02-09-2012, 09:11 PM   #20
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Originally Posted by Gatordoc50 View Post
The argument for stocks always uses unrealistic investment periods of 50 years or more. Ridiculous. To say bonds are inferior investments ignores the experience of the largest group of investors in history, the baby boomers. Buffet only makes 100k a year and at his advanced age still isn't retired. Why would anyone take his advice? lol
If I had net worth of 50 billion dollars I might feel the same way he does. If his portfolio drops 50% in a week or two he still has 25B. I'm eating Alpo.
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