Warren Buffett’s Current Thoughts on Stocks, Bonds, and Gold

You should take a few minutes today to read the latest thoughts from one of the greatest investors ever, Warren Buffett. In an article he wrote for today’s issue of Fortune he offers great insight into why stocks beat gold and bonds. You are wise to read the whole thing, but I’ll leave you with a few thoughts to ponder.

Buffett On Bonds:

Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”

Buffett on Gold:

Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Buffett on Stocks:

Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. 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. More important, it will be by far the safest.

Our View

Our firm is aligned with Warren Buffett. We also view bonds as being priced to deliver return-free risk. Why? Because yields today are less than the expected rate of inflation.

We too view Gold as unproductive and hold only a small amount for some clients as a hedge. Read Tony’s blog post for more thoughts on Gold.

Finally, if you are a regular reader of my emails then you already know how we feel about stocks today. There are many great businesses trading at prices that we believe to be compelling. The market as a whole is trading well below its historical valuation measures. It’s a good time to be buying stocks if you are a long term investor. Don’t let fear and uncertainty get in the way of making some smart stock purchases. Focus on high quality businesses with a competitive advantage, strong balance sheets, and growing profits.

Photo by: Fortune Live Media