Buffett Thinks Bonds Are A ‘Terrible Investment’ But, According To His Own Methods, Stocks Look Even Worse

A couple of weeks ago Berkshire Hathaway held its annual shareholders meeting known to many as the “Woodstock for Capitalists.” I have never attended (I don’t like crowds) but I’m always curious to know what Warren Buffett and Charlie Munger have to say at the event. The two tweets below struck me as especially poignant right now.

Apparently, the Oracle of Omaha was quoted as saying, “long-term bonds are a terrible investment at anything close to current rates.” I can’t say that I disagree. The real yield on the long bond is essentially zero right now and if inflation picks up over the next three decades, as Buffett expects it to, it will quickly go negative.

But there’s another pair of observations Mr. Buffett has made in the past that should also be considered here. The first concerns comparing the value of bonds to that offered by the stock market: “Though the value equation has usually shown equities to be cheaper than bonds, that result is not inevitable:  When bonds are calculated to be the more attractive investment, they should be bought.” -Warren Buffett, 1992 Berkshire Hathaway Chairman’s Letter

Bonds offer a static yield so their forward return, at least in nominal terms, is known but how do we determine what stocks offer over a specific period? Here is where his second observation comes in. A while back Buffett suggested the ratio of the total value of equities relative to the size of the economy as, “the single measure of where valuations stand at any given moment.”

What makes this measure most valuable is the fact that it is so highly (negatively) correlated with future 10-year returns in the stock market. There is no better visual representation of my favorite Buffett quote of all: “the price you pay determines your rate of return.” Pay a low price, get a high return and vice versa. Investors today are paying very close to the highest prices in history thus will inevitably receive some of the lowest returns on record.

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Disclosure: Information in “The Felder Report” (TFR), including all the information on the Felder Report website, comes from independent sources believed reliable but accuracy is not ...

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