Warren Buffett recently wrote an article
in Fortune (a cut from his forthcoming shareholder letter) which explains why he prefers owning businesses (either outright or through the stock market) than owning currency based investments (bonds, cash) or gold.
Buffett's writing and thinking is a model of clarity. Kid Dynamite's highlighting and analysis
is a worthy follow-up.
Buffett does not like bonds or cash as investments because they are (in his view) unlikely to retain their real value over the medium to long term. In God we Trust - but the hand that activates the printing press is human
. Buffett defines investment return in real goods and services
- investment is putting away some spending power
now in the expectation of having more spending power
later. Bonds and cash make nominal returns. Buffett thinks real returns are unlikely and disastrous outcomes are possible: "[currency based investments] are among the most dangerous of assets. Their beta may be zero, but their risk is huge".
Quoting Shelby Davis he notes that at current yields currency based investments offer return free risk.
Though unstated you can tell Buffett does not predict a Japanese outcome. Twenty years of deflation would make bonds a fantastic investment by Buffett's criteria. That is a possibility he does not even entertain...
Buffett is not fond of gold either - waxing lyrical on its uselessness. The world gold stock if melded together would fit in what he views as a useless 68 foot cube. Think of it as sitting comfortably in a baseball infield.
And he notes the extraordinary value of that cube. At current prices that cube would buy all the agricultural land in the United States, sixteen companies as valuable as Exxon and leave you a trillion dollars in walking-around money. He cannot imagine why you would prefer own the cube than the alternative assets. Similarly he can't imagine why you would want to own a bit of that cube than an equivalent bit of the alternative assets.
Over the next century 16 companies as valuable as Exxon will have thrown of trillions in dividends - and the agricultural land will have thrown off huge quantities of wheat, corn, beef and other valuable commodities.
The gold will just sit there.
The best line in the article is one of Buffett's sexual zingers: you can fondle the cube, but it will not respond.
He is right of course. Some people think that gold is a good investment because it has retained its value (measured in agricultural land) for centuries. That is all the proof you need that the investment is stupid. The agricultural land had a yield all that time. The gold probably got stolen - and had no yield.
Buffett's prescription: own productive assets.
And that is good advice if you pick productive assets with competence. If you don't I think the Buffett prescription can be a recipe for disaster.
You see the gold does not have free-will - or any will for that matter. Fondle it and it does not respond.
Stocks and businesses however have people running them - and people range from clever to inanely stupid. Integrity levels cover the spectrum from someone you would hope would marry your daughter to Bernie Madoff.
Willie Sutton robbed banks because that is where the money was. Now the money is on Wall Street. If Willie Sutton was reincarnated he would come back as some Wall Street scumbag (or an investment banker). And on Wall Street he would almost certainly not be prosecuted. People who rob banks get prosecuted. People who steal via the stock market not so much.
Because the scumbags go where the money is Wall Street is particularly thick with scumbags. Wall Street has tens of thousands of Willie Suttons.
Fondling stocks can be very profitable if you know what you are doing - especially over very long time periods. But the proviso is there ... if you know what you are doing.
Previously Warren Buffett observed that risk comes from not knowing what you are doing
And gold is pretty easy to understand. It just sits there. People however are difficult to understand and sometimes dangerous - and people and the stock market are intertwined. And you are more likely to find a scumbag in the stock market than internet dating (the scumbags have Willie Sutton motives).
If you do not know what you are doing fondling stocks can be either as much fun or as dangerous as fondling people. Some may respond by being nice back. Some will spike your drink, lift you wallet and sodomize you on the way out.
Mr Buffett makes it seem simple. I love reading him - but sometimes I think he is dangerous because he makes it seem so easy that it lulls people into a false sense of security...
PS. Positions: no gold. Long companies with high levels of management integrity and decent valuations. Short scumbags, slimeballs and villains. Names can be left out of this piece.