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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Warren Buffet Makes a Big Macro-Call on Bonds

October 06, 2010 | About:

H/T to Ravi of http://www.rationalwalk.com for this find.

Yesterday Warren Buffett spoke at the Fortune Most Powerful Women Summit.

Buffett stated:

It’s quite clear that stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities. But people do because they, the lack of confidence. But that’s what makes for the attractive prices. If they had their confidence back, they wouldn’t be selling at these prices. And believe me, it will come back over time.”

Buffett is clearer warning here to stay away from bonds. To be honest I find it mind-boggling that anyone is buying long term bonds now. If an investor wants a yield slightly higher than than cash they might consider a short term bond fund. But I cannot for the life of me understand the people who are buying long term bonds.

I have stated this statement several times over the past few months. Normally "experts" are trying to predict where interest rates are headed. They are almost always wrong but that is a side point. This is the only time in recent history where interest rates have nowhere to go but up. I do not know when this will happen but it is highly likely it will happen in the next 30 years. Yet investors are demanding less than a 3.875% yield on 30 year bonds.

In addition, I have stated in previous articles that normal interests rates (interest rates in normal economic times) are at least 4%. Anyone who buys bonds with less than a 4% yield that locks them in for 30 years is going to get killed when you can get a three month CD with a higher yield sometime in the next several decades. Unless someone thinks interest rates will stay below 4% for until 2040, buying 30 year Government bonds now is shear insanity. Of course an investor can hold until maturity. But an investor will likely feel stupid holding a 30 year 3.85% bond, when money market accounts are yielding 4 or 5%. I have not even mentioned inflation which will almost certainly wipe out all after inflation gains.

high quality blue chip stocks on the other hand offer an impressive return compared to bonds. Just take the Dow Jones ETF for example (symbol: DIA). The earnings yield is 8.33%, and it has a dividend of 2.45%. This dividend will likely grow a few percentage points a year and dwarf the 3.85% fixed return bond investors are earning.

Whenever investing in any asset class I try to imagine what the person on the other side of the trade is thinking. When it comes to yield on long term Government bonds I am left clueless.

The video of Buffett is below.

Disclosure: I am short long term treasury bonds

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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