“Right now bonds should come with a warning label.”
That stark assertion sums up Warren Buffett’s latest letter to shareholders. Calling bonds “among the most dangerous of assets,” his sentiment adds credence to BlackRock Chairman Larry Fink’s controversial advice from Wednesday that investors should allocate 100% of their assets to equities.
Quoting the late investment banker Shelby Cullom Davis, Buffett writes, "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."
Noting that the dollar has fallen a “staggering” 86% in value since 1965, when he took over management of Berkshire, Buffett writes it takes $7 today to buy what $1 did at that time.
“For taxpaying investors like you and me, the picture has been far worse,” according to Buffett. “During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income.
The reason, he explains is that the investor's visible income tax “would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation ‘tax’ was more than triple the explicit income tax that our investor probably thought of as his main burden. ‘In God We Trust’ may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.”
So what does he like? Productive assets, according to the "Oracle," whether they are businesses, farms, or real estate.
“Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola and our own See's Candy meet that double-barreled test," he says. "Certain other companies–think of our regulated utilities, for example–fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.”