Warren Buffet Hates Bonds and Loves Stocks!

[craigr]

After seeing the posts here and elsewhere I decided to post about Buffet's latest musings on 100% stock portfolios:

https://web.archive.org/web/20160324133 ... es-stocks/

In particular, I wanted to see how his company Berkshire has done against some popular bond funds the past 10+ years. So I went to stockcharts.com and plotted Berkshire vs. LT Treasuries vs. ST Treasuries vs. Vanguard Total Bond Fund and got this:



So the past 12 years Berkshire has barely beaten very safe Short Term Treasuries!

A diversified portfolio of stocks, bonds, cash and gold provides a far safer and more likely profitable ride than putting 100% of one's money in any single asset.

[MediumTex]

Devastating.

[Lone Wolf]

Nice graph, Craig.  I had no idea that BRK.A had been through quite that level of volatility.

[FarmerD]

Craig,
That chart is worth a thousand words.  Buffet is nothing more than a typical run-of-the-mill investment guru running off a reputation he stopped earning years ago.

[alvinroast]

Awesome chart! Short-Term Treasuries never looked so good. And I can buy them straight from the fed and don't need 100 grand.

[possum]

You are comparing apples and oranges....

If you want to compare the results of the capital allocation at Berkshire, you need to be looking at the growth in book value over the time period in question, not the value that the market is putting on the holding company. From 1999 through 2011, book value of BRK increased by ~165% beating all of your chart entries plus the S&P 500.

Also, you might be interested that Berkshire owns roughly the same amount of cash and bonds as they do equities. So they are far from a 100% stock portfolio.

[AdamA]

You are comparing apples and oranges....

That's the point, though, right?

If you want to compare the results of the capital allocation at Berkshire, you need to be looking at the growth in book value over the time period in question, not the value that the market is putting on the holding company. From 1999 through 2011, book value of BRK increased by ~165% beating all of your chart entries plus the S&P 500.

Also, you might be interested that Berkshire owns roughly the same amount of cash and bonds as they do equities. So they are far from a 100% stock portfolio.

Why does that matter to someone who needs to retire in the near future?  The stock's cash value is what they're going to get.  They can't afford to wait for it to catch up to the book value, which could take a very long time.

[clacy]

Book value?? Book value is meaningless. If book value actually mattered, the entire mortgage/cds mess would have never taken place.

If you want to speculate that a stock is undervalued relative to book value that is fine, but just know there are likely others out there that are speculating that book value is overvalued. They only way to dtermine who is right at any given point is the market price however.

[craigr]

You are comparing apples and oranges....

If you want to compare the results of the capital allocation at Berkshire, you need to be looking at the growth in book value over the time period in question, not the value that the market is putting on the holding company. From 1999 through 2011, book value of BRK increased by ~165% beating all of your chart entries plus the S&P 500.

Others have hit on the book value point. It doesn't mean much to an investor that is using the stock value for living expenses. Book value is very nebulous as well. Until the assets underneath sell, the book value can be a wide range.

Also, you might be interested that Berkshire owns roughly the same amount of cash and bonds as they do equities. So they are far from a 100% stock portfolio.

Exactly! Something I brought up in my blog post as well. Buffet slams bonds (and gold), but he holds a ton of assets with fixed income like properties and has even owned silver in the past. He is making public statements that do not match his actual strategy inside of Berkshire.

And without the big bailouts in 2008 I think Berkshire would be even in worse shape. Buffet has benefited greatly from government help. IMO.

Besides the above, it's not a good idea to take public investing advice from billionaires. There is no telling why they are making certain statements. Buffet for instance is a huge Obama supporter. For all we know he is encouraging big stock market investing to help Obama's re-election campaign. Best to ignore these people and keep a balanced and diversified portfolio.

[lazyboy]

Thanks, Craigr. That's a really helpful, eye opening chart and analysis. I found it also interesting that although WB doesn't favor gold, his own chart shows that gold did 2nd best over a 40 + year period compared to stocks. I'd imagine that they both did well/poorly over different time periods, which also points out the need for diversification.

[possum]

The market price of Berkshire has nothing to do with Buffett's views on the relative merits of investing in stocks vs bonds. Using that as a proxy for how well his investing philosophy has worked out is silly since the market price of Berkshire is uncoupled from the market price of the investments that Berkshire has made.

Those making the point that book value isn't market value are missing the whole point of this. The book value of Berkshire incorporates the *market price* of Berkshire's investments which is what this is about - not how someone would have done investing in Berkshire itself which is an entirely different conversation. I realize that BRK's book value incorporates more than just investment values, but it was a quick proxy for that. If you really want to look at the subject, one should isolate the performance of the BRK equity portfolio over the time period an use that as a measuring stick.

[moda0306]

Possum,

If the market value of BRK's holdings, at some point, was materially lower than the market value of BRK itself, then you might have a point worth discussion.

However, Buffett is clearly advocating one of three strategies, 1) invest in stocks, in general, 2) invest in BRK, because he's such a good stock picker, or 3) pick stocks yourself.

Number 1 has also been a relative failure for the past decade, and number 3 is extremely risky if you don't know what you are doing.

So that leaves us with buying BRK... but if BRK can fluctuate in the market far from what its holdings can, what the hell is the purpose of using it?  Yes, if Buffett was picking these stocks for himself, maybe he'd appear more like a success... but he's not... he's asking us to use his holding company as a vehicle with which to hold those stocks, and doesn't articulate the risks involved for US to use his amazing mind.

You've raised a good point, but Buffett's comments on bonds & gold still leave him in the dog house in my book.  Some things we just DO NOT know, and he doesn't leave much room for that in his rhetoric.

[MediumTex]

I don't think it's more complicated than Buffett is simply talking his book, just like most people do.

The problem, though, is that what is good for Buffett isn't necessarily good for all of the people who listen to what Buffett says.

I find it ironic that the stellar performance of Berkshire Hathaway basically stopped when "Warren Buffett" became a household name 10-15 years ago.  Since then, BRK's performance has been nothing special.

We can talk about increases in book value and what that's supposed to mean in theory, but the fact is that secular bear markets in stocks are all about P/E compression and during such periods you would expect the book value of LOTS of companies to increase relative to share price, but that isn't really much consolation to someone who needs to retire or otherwise needs performance today, not years from now.

[craigr]

As a follow-up, I compare Berkshire to Vanguard's Wellington and Wellesley Funds which are both actively managed value funds with stock in the 40-60% range and bonds filling the remainder:

Warren Buffet Horribly Beaten by Vanguard's Funds



Both of Vanguard's actively managed value funds handily beat Warren Buffet. These funds are probably a more appropriate comparison to Berkshire.

[ozzy]

Nice charts Craig, thanks.

[Jake]

without the big bailouts in 2008 I think Berkshire would be even in worse shape. Buffet has benefited greatly from government help. IMO.

Here's a link about that: http://reason.com/archives/2012/02/09/w ... singlepage
Not such a free market guru after all.

[lazyboy]

Thanks for the comparison to the Vanguard funds, Craigr. That's a very helpful comparison to two solid funds. Wellesley fund, which is 40/60 stocks /bonds, has been a better performer and safer. Duh! It must be the bonds.  I like Wellesley and I thought seriously of using it for my IRA before I found the PP.

[lazyboy]

Jake, thanks for the article on Buffet. It's a real eye opener on crony-capitalism, which critics on on both the left and right has been saying is what we have here. WB is a master at manipulating the system. The dilema I have is that I agree with him that we need a better transport and rail system, including high speed rail. And yet it's so clearly a manipulation even if it's for socially desirable ends.

[Lone Wolf]

Here's a link about that: http://reason.com/archives/2012/02/09/w ... singlepage
Not such a free market guru after all.

Outstanding article, Jake.  Warren Buffett is the Lord of Crony "Capitalists".

[craigr]

without the big bailouts in 2008 I think Berkshire would be even in worse shape. Buffet has benefited greatly from government help. IMO.

Here's a link about that: http://reason.com/archives/2012/02/09/w ... singlepage
Not such a free market guru after all.

Thanks for the link. Pretty much confirms a lot about what I thought.

I was watching in 2008 when AIG and other insurers were put under pressure and wondered how Berkshire's General Re would handle having to pay out huge claims if the insurers failed (General Re insures insurance companies - the ultimate Black Swan risk IMO). Turns out that when the bailouts happened Warren Buffet dodged that bullet too. He's made a lot of money off government bailouts.

[Gosso]

Here are a couple of interesting charts where gold is used (rather than USD) to price the assets:





Source: http://pricedingold.com/

Could be a good time to buy stocks?  Although I have no idea -- that's why I use the PP 

[lazyboy]

Here are a couple of interesting charts where gold is used (rather than USD) to price the assets:





Source: http://pricedingold.com/

Could be a good time to buy stocks?  Although I have no idea -- that's why I use the PP 

Another really good chart, Thanks, Gosso.

[alvinroast]

Nice chart. A couple of weeks ago Buffett also said that real estate is a definite buy. I was looking to buy a rental property, but now I'm not so sure. If he says buy I think there's still a ways to the bottom. That horrible, unproductive yellow metal has had quite a run the last decade as well.

[craigr]

Nice chart. A couple of weeks ago Buffett also said that real estate is a definite buy. I was looking to buy a rental property, but now I'm not so sure. If he says buy I think there's still a ways to the bottom. That horrible, unproductive yellow metal has had quite a run the last decade as well.

I don't think real estate is ever a buy personally. Just make sure you have the personality to handle rentals because it can be a ton of work with big problems if you have a problem tenant.

Some researchers looked at the prices of real estate I think in Amsterdam covering a few hundred years. The result? Basically zero real returns over inflation. Here is an article that mentions it prior to the real estate explosion:

http://www.nytimes.com/2006/03/03/world ... wanted=all

From the article:

"That is to say, where everyone from your wise old uncle to the broker who sold you your house holds it as gospel that real estate is one of the best long- term investments, this longest of long- term indices suggests that, on the contrary, it sort of stinks. Between 1628 and 1973 (the period of Eichholtz's original study), real property values on the Herengracht - adjusted for inflation - went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, "Real home prices did roughly double, but took nearly 350 years to do so."

I continue to believe real estate is just a consumption item. I would only buy it for speculation, not investment.

[amp]

Really?  You consider it a "consumption item"?  What other "consumption items" not only retain their value, but keep pace with inflation, and can be financed for 30 years at 4% fixed?

I would completely agree that it doesn't make sense to buy a house with cash and let it sit vacant for the next 30 years (or whatever length of time) and then sell it hoping for a profit.  However, I've never heard of anyone ever doing that.  Just like a stock or bond, appreciation isn't the only profit source to be considered.

If it's a personal residence, then it's simply a substitute for renting.  You're going to pay to live somewhere and sometimes it might make sense to buy, depending on your circumstances and needs.  The idea that either buying or renting is always the right/wrong decision is naive, at best.

If it's a rental, then it should produce some income otherwise you shouldn't buy it!  It's sort of like a dividend paying stock that you buy with leverage.  If the dividends (rent) pay for the acquisition/operating costs (PITI + maintenance), then you can come out way ahead.  Yes, there are risks (I've landlorded since 1994 and have done a couple of evictions) and it's not a completely passive activity like owning stock.  However, it's pretty hard to fix up a stock, you just don't have much control.

Like everything in life, there are pros and cons to real estate.  Frankly, I'm surprised at how dismissive many "savvy investors" are about real estate.