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Warren Buffett: Why stocks beat gold and bonds

181 points by DVassallo 15y ago

spenrose 15y ago
Buffet: "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." Buffet implicitly rejects global warming here, specifically the latest projections on drought: http://earlywarn.blogspot.com/2012/01/another-terrifying-drought-paper.html http://earlywarn.blogspot.com/2012/01/another-terrifying-dro... and others.
- MikeCapone 15y ago
  I don't think he's rejecting anything, just making a general point about investing in something with cashflow (a business, farmland) vs speculating in something that is only worth what others will pay for it (gold, commodities)
  - spenrose 15y ago
    Did you follow the link? Buffet's recommendation comes with a long time horizon, and the asserion that he can predict stability: "Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle." I think he's right about people, but in the statement he is also implicitly asserting that peanuts will be a cheap commodity in 100 years. That rejects our best projections regarding climate change. The much more important implicit assertion I quoted in the downvoted post (thanks guys) is that you can buy productive farmland now that will be productive in a century. That will only be generally true if climate change does not happen.
    - Czarnian 15y ago
      I'd be willing to bet that when he wrote that sentence, global warming was one of the furthest things from his mind. Even so, I'm pretty sure Warren Buffett is a businessman, not a climate scientist. It's called the Appeal to False Authority, look it up.
    - MikeCapone 15y ago
      I've been following Buffett for a long time. I've read all of the BErkshire letters and most of the partnership letters. I've read 2 biographies of him and watched and read dozens of interviews. He was making a general abstract point, not a specific prediction. That's just the way he talks, and maybe it could be confusing if you are not used to it, but that still what it is. And btw, MidAmerican Energy, a Berkshire owned utility, is the biggest investor in wind power in the US and just bought huge solar power projects.
- delinka 15y ago
  You seem to implicitly reject the human ability to adapt. We'll find a way to adapt to the changing environment. Hell, we might even adapt our habits (ha!) and allow the environment to correct itself. Regardless of the plausibility of global warming, 400 million acres of farmland will still produce more value in crops than you could shake your investment stick at.
  - spenrose 15y ago
    No, I read very smart people who try to analyze what it would take to adapt, and they range from deeply concerned to terrified. Start here: http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/ or here: http://earlywarn.blogspot.com/
- tomjen3 15y ago
  Honestly (and regardless of the actual value of global warming) the projections have changed so much and are so impossible to nail down exactly that they might as well be read in tea leafs. And if we get draught, what do you think the farmers will do? irregate their fields.
  - spenrose 15y ago
    For "changed" please substitute "have gotten more specific, more grim, and better corroborated." WRT irrigation, we lack enough water now on a global scale.
    - tsotha 15y ago
      >For "changed" please substitute "have gotten more specific, more grim, and better corroborated." That's not true at all. If anything the last decade has shown the data and models are woefully inadequate for prediction.
- argv_empty 15y ago
  Global warming is a red herring here. No matter how hard food production gets, it will remain a value-creating activity as long as there are people (if you don't believe me, then stop eating).
- hnal943 15y ago
  So you believe global warming is going to end life as we know it. How does that change your investment strategy?
ericdykstra 15y ago
Same conclusion from a slightly different angle: You trade risk for expected payout. Imagine each of these scenarios is like flipping coins with different values attached. At the end of the year, you flip one coin: - Bonds: Heads, you gain 1%. Tails, you gain 1%. If it lands on it's side, you lose everything (government default) - Stocks: Heads, you gain 15%. Tails, you lose 10%. A lot more risk here, but the expected value of flipping the coin is higher. Some people would rather flip the bonds coin, some would rather flip the stocks coin, and it depends on the individuals' risk tolerance. Gold doesn't fit the model, because buying gold is speculation rather than an investment.
- Wilduck 15y ago
  I think this is miss-representing Buffett's position here. First off, he explicitly states that the riskiness of an asset should not be measured by its volatility: > Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk. He goes on to describe what sorts of investments he thinks are worthwhile. Namely investments in assets that will continue to be productive in the long term. > Investment in productive assets, whether 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. Again, this isn't framed in terms of risk. Probably because with a diversified portfolio the risk is not at all analogous to flipping a coin (there is obviously still risk, but it's not that simple). Instead, it's framed as current versus future consumption. As for gold, I don't think he frames it in terms of speculation versus investment at all. Buffett recognizes that gold will probably continue to hold value. Instead, he decides to frame the question in terms of whether gold is a productive asset. It isn't. It will just sit there. > You can fondle the cube, but it will not respond.
- deleted 15y ago
  [deleted]
- illumin8 15y ago
  Stock indexes are more like: heads you gain 10% (average year), tails you lose 50% (every 5-10 years).
klochner 15y ago
He omits the only valid reason any non-speculator would own gold - it holds it's value through times of political turmoil - holds it's value over millenia rather than decades or centuries. A coup d'etat may result in seizure of private companies, rendering your stock worthless, but not touching the value of gold. It would be speculating to put all your assets into gold, but a small amount is like an insurance policy. relevant: http://www.csmonitor.com/World/Americas/2011/1105/Hugo-Chavez-looks-to-take-Venezuela-s-private-Los-Roques-paradise-public http://www.csmonitor.com/World/Americas/2011/1105/Hugo-Chave... Government expropriation of private industry has been a key policy of Chávez's regime. More than 450 companies have been expropriated this year alone. ExxonMobil, which had its assets seized in 2007, is still fighting the Venezuelan government for $7 billion in compensation it believes it is owed.
- mikeash 15y ago
  An unstable government could just as easily seize your gold. What investor cares about millennia? Centuries is already too much, unless you're vastly more concerned about your great great great grandchildren than most people. 100 years is probably the absolute largest possible upper limit for a real investor to care about, and typically it's much less still.
  - dmm 15y ago
    I think he was talking about a small amount of gold. Twenty-thousand dollars worth could fit in your hand and easily be smuggled in clothes, luggage, etc. That's pretty handy if you had the flee the country from nazis(or whatever) that have stolen all of your other assets. Admittedly that's a pretty unlikely scenario.
    - cube13 15y ago
      It's even more unlikely because you then have to find a buyer that's willing to pay market price for the gold wherever you end up at. You'll be reduced to selling it for whatever people are willing to pay.
shingen 15y ago
He's wrong. Stocks do not beat gold once inflation outpaces the rate of average market returns, which is exactly where we're at now. Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock, Apple at the absolute bottom, or buy Dell the day it IPO'd or other similar freak scenarios, and then hold all the way through, and then sell at the absolute top. On a long term duration, it becomes increasingly difficult to survive even modest inflation and market changes (you have to constantly shift your investment strategies for all sorts of reasons: age, family, economic conditions, and so on). Few people are skilled enough to do that well. With gold, you merely need to buy and hold - IF you believe the fiat currency will continue to depreciate due to 'printing' (to pay for entitlements, to devalue national debt, to fund deficits, and so on). There are very few things you could leave for your grandchildren that will retain their value, real estate and gold are two prime options. If you had bought and held the stocks that make up the Dow over 60 or 70 years, you'd have gotten demolished because the Dow constantly shuffles its index. That is to say, you can't look at the Dow from 70 years ago and compare it to today, because the index is completely different, and the average investor could only easily purchase index ETFs in the last 30 or so years. In reality, the Dow is not at 13,000 today as we knew 13k to be back in 1998/99 during the huge stock market bubble. Inflation has eroded that nominal value by at least half. The Dow is more likely at 5,000 to 6,500 depending on what you believe real inflation has been over the past 14 years (not the Fed's bogus CPI numbers). The dollar has lost 97% of its value since the Fed came into existence. There's no way you can outrun that unless you hit homeruns in the stock market, which is what Buffett did, and which is exactly what your average investor cannot do regularly. The majority of people that invest in the stock market lose money. That's tracking since the late 1960s when the US went off the gold standard and inflation skyrocketed (sending oil, gold, and nearly everything radically higher). Buffett hasn't made most of his wealth in the stock market anyway (nor that of Berkshire). He has made it by using insurance company float cash to purchase other high float companies, and then rolling that ball forward. Nearly all of his big market gains peg to one period of time, the 1970s, when stocks were once-in-a-generation cheap; his timing was brilliant, but it was an exceedingly rare scenario.
- dman 15y ago
  Are you taking dividend yields into account?
ef4 15y ago
His basic point is almost a tautology. Yes, it's great to own productive assets. The real trick is predicting which ones will really stay productive over the long term. Just buying a broad index is often not a winning strategy when you factor in the taxes, inflation, and survivor bias. Certainly Buffet hasn't just bought a broad index -- he makes highly targeted investments. And he glosses over a basic point that I've seen many commenters miss. An asset like gold behaves differently under bubble conditions than an asset like a tech stock, tulip, or house. The production of those things is price elastic, and rising prices cause rising production that ultimately crashes the bubble. But expanding the supply of gold available for trade by more than a couple percent a year simply isn't feasible. This is precisely why markets have repeatedly chosen it as a form of money. Of course this means the market for gold is driven purely by demand sentiment, and of course demand could crash. But this is true of every currency -- it's only valuable because it's valuable.
- jtbigwoo 15y ago
  An asset like gold behaves differently under bubble conditions than an asset like a tech stock, tulip, or house. The production of those things is price elastic, and rising prices cause rising production that ultimately crashes the bubble. The number of new home sales at the top of the bubble was about 1.4 million/year vs. existing housing stock of over 70 million. That's less than a 2% increase per year, not counting the thousands of home that are demolished each year. Vast new production isn't required for a bubble.
- dwc 15y ago
  The real trick is predicting which ones will really stay productive over the long term. Just buying a broad index is often not a winning strategy when you factor in the taxes, inflation, and survivor bias. Certainly Buffet hasn't just bought a broad index -- he makes highly targeted investments. This depends on how high you set the bar. If you're trying to be Warren Buffet then buying a broad index obviously won't get you there. With the bar set somewhere in the neighborhood of "I'd like to protect and increase the buying power of my money" then buying something like SPY starts looking a lot better, even with taxes and inflation taken into account.
seanalltogether 15y ago
"Can you imagine an investor with $9.6 trillion selecting pile A over pile B?" No, but most people aren't investors, they're just people with a small amount of money buying pieces of paper from each other to gamble over which company is most attractive.
kahawe 15y ago
In the 90s everyone rushed the IT shares and then the dotcom bubble burst. In the first decade of our new millennium, real estate and all sorts of weird financial products somehow building on real estate were THE best way to invest money because nothing can happen, you have a house standing right there, right?? Then that bubble burst. Now, you'd think people would have learned by now but no... sure as hell now everyone rushes to buy gold and silver because "hey what could possibly happen"??? Even one of my colleagues who has been burned both times on dotcom shares and some shady real estate thingy in east-germany, no less, now religiously swears by gold and silver because what could possibly happen? People seem to really not be able to grasp that it is just another market.
- rubashov 15y ago
  > everyone rushes Who is rushing to buy gold? I'd be surprised if more than 1% of households have meaningful gold exposure.
  - Symmetry 15y ago
    I'd be surprised if more than 1% of household had actually held tech stocks in 2000, also.
  - InclinedPlane 15y ago
    Look at this graph: http://blog.thomsonreuters.com/wp-content/uploads/2011/04/GLD_INF0411_SB.jpg http://blog.thomsonreuters.com/wp-content/uploads/2011/04/GL... Is that the sign of an investment that keeps growing in value steadily across the ages or merely the sign of a speculative bubble about to burst? Hint: look at the late 70s as well.
    - illumin8 15y ago
      Have you considered that the chart merely shows the value of gold in US dollars, and that it could be, this time, that the US dollar is the speculative bubble that has been bursting for some time now.
mutant 15y ago
Lets listen to the jailer tell the inmates that shackles are better than manacles.. grabs popcorn
Cushman 15y ago
Imagine if gold were a company. Friend: "Hey man, you gotta get in on this— this stock has gone up 30% in the last year! Nowhere to go but up!" You: "Wow, that's amazing! What does it do?" Friend: "Um... it doesn't corrode?"
- smokeyj 15y ago
  Imagine if the USD were a company. Friend: "Hey man, you gotta get in on this— this stock has gone down 30% in the last year! Nowhere to go but down!"
  - phillmv 15y ago
    … Which is why Buffet also says he doesn't like currency denominated assets.
  - aqme28 15y ago
    Currency is a terrible way to invest. Nobody is arguing that.
    - smokeyj 15y ago
      Not if that currency is gold. Unless, you don't like turning profits of course.
      - Steko 15y ago
        We got it you like gold. Warren Buffet doesn't. I'll take his advice over yours.
      - william42 15y ago
        When is the last time that you purchased a product or service using gold?
  - william42 15y ago
    Hint: the value of USD isn't as an investment. In fact, if the value of USD goes up, that makes it less useful, because the point of having money is to spend it. For example, one of the many reasons of the utter trainwreck of Bitcoin is the fact that more people were holding it as speculation than actually using it to purchase anything. And it's only 3% in the last year if you aren't trying to compare it to something mid-bubble. The USD is totally going down with respect to tech stocks, guys!
DannoHung 15y ago
Man, you'll never be able to convince gold bugs it's a bad idea. Shit's just too shiny.
tnuc 15y ago
Warren Buffet once wrote about gold... It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
- jrockway 15y ago
  Gold has utility: it easily forms a plating on other metals, and conducts electricity even when continuously exposed to air. This is not true of many other metals, hence the popularity of gold-plated electronic interconnects.
  - brown9-2 15y ago
    But is that utility that you mention the reason why people bury it again and pay people to stand around guarding it? Gold may have some utility and practical applications but that does not seem to account for all of it's perceived value.
    - deleted 15y ago
      [deleted]
  - lmkg 15y ago
    This is exactly why I hate it so much when people use gold as an investment instrument. Gold would be useful, except its price is high and its supply is low, because people purchase it with the sole intent of not doing anything with it.
  - aqme28 15y ago
    I'd need to find the statistic again, but it's something like 15% of the value of gold is due to its utility, and the rest is due to it being shiny/historically valued
    - Steko 15y ago
      50% jewelry (half to india), 40% investment, 10% industrial
jpdoctor 15y ago
The fact that Warren is on the hook for several billion dollars of S&P puts is mentioned nowhere in the article. When O When are reporters going to understand conflict-of-interest?
- hodder 15y ago
  Do you honestly believe that Warren is trying to deceive you into investing in productive assets rather than a shiny metal because he wants to manipulate the market?
  - jpdoctor 15y ago
    Do you honestly believe he is not talking his book?
  - reedlaw 15y ago
    I believe that his speculation argument against gold holds for the stock market as well. Investors create feedback loops when they buy stocks that then creates even more demand. Buffet believes in the S&P and so he will naturally encourage others to do so.
    - kyrsey 15y ago
      The value of anything can be propped up by speculation, what varies is the value which can be maintained without speculation (e.g., in cases where the bubble bursts). I think this is the use of discriminating among (A) resources reasonably expected to decline in value, (B) resources expected to 'hold value' modulo speculation, (C) resources expected to have ongoing returns with or without speculation.
- shahan 15y ago
  It's Warren Buffett, man. Perhaps he invests (long-term) in stocks because he believes what he writes, rather than writes what he does because he just happens to be invested in stocks. You really think there should be a disclaimer here?
- zotz 15y ago
ww520 15y ago
Buffett is great at picking stocks. The problem with his statement is that he is a professional stock investor but we mere mortals are not. We have our busy lives other than watching the market. For us, the correct strategy is to do balanced portfolio with 50/50 :: stock/bond, or some other ratio.
- iy56 15y ago
  Paying someone like him a fee to choose stocks for you seems like a much better strategy to me.
  - yannickt 15y ago
    The challenge is identifying "someone like him" before the fact. But if you could do that, then you would know why he's been so successful and you'd be able to do it all by yourself. Most funds do not beat the market in the long term (> 10 years) after costs, and for the same asset allocation, someone who just invests in the market (e.g. through low-cost index funds) will do much better than the average professional manager.
    - iy56 15y ago
      Investing money produces measurable results. It is possibly to verify that someone is a successful investor without knowing why he is successful.
      - yannickt 15y ago
        The only thing you can measure is past performance. In investing, past success is not a guarantee of future long term success. Long Term Capital Management had two Nobel laureates among its partners. The fund was extremely successful in its first few years (~40% yearly return with little volatility), but then lost over four billion in just a few months, and eventually closed.
        iy56 15y ago
nonsequ 15y ago
I don't think that Buffett is saying that stocks, at any given point in time, will deliver you better returns over a given time period than gold or bonds. He quite clearly notes that there are times when bonds are beaten up and they'll offer a great return. Buffett, being a virtuoso, variously reaps returns from derivative contracts, insuring sweepstakes prizes, and solar farms. He once bought a boatload of silver and tried to corner the market. He won't argue with you that with all of these there's a right time. That's because all of these asset classes are subject to 'animal spirits.' Stocks went through the tech bubble. At various times bond yields have been too low when judged against the real risk that you do not get your principal back in full. Bond yields are pretty darn low right now. Gold may seem invincible now and it may seem that the world is only going to continue falling apart and Helicopter Ben is only going to keep running the presses, but don't you remember a time when stocks did nothing but go up? Or when people thought that house prices would never go backward? All of these asset classes are also subject to the 'invisible tax' of inflation. As the money supply increases, all currency is devalued and everything that's denominated purely in currency loses value as well. To preserve and grow wealth, you must first beat inflation. Stack the assets up against each other on these merits and I think that's where his logic lies. Let's remove 'animal spirits' for now. Look at these asset classes dispassionately for what they represent. Ignore prices, what they've done in the past, where they are now. Bonds are contracts for loaning currency. You as the lender demand repayment of your principal and interest payments concordant with the risks you take that the money does not come back to you. Most bonds as structured do not protect you from inflation unless your nominal payout is explicitly pegged in the contract (as with TIPS). You pay today's currency for a fixed amount of tomorrow's currency and if that currency is worth less (as it probably will be) you're out of luck. Gold is a real good. It's a particularly nice real good in that it's malleable and somewhat plentiful but both difficult to destroy and difficult to make more of. Oh and it's shiny. Everybody agrees that gold is an excellent real good in that way. Those factors, particularly that it's difficult to make more of, protect you from inflation. The real value should stay the same so the price of gold increases as inflation brings currency down around it. Gold beats inflation for sure (except maybe for the bit of mining and new discoveries that get done). Stocks represent ownership in companies. A company is a group of people operating capital assembled to provide a good or service to others in exchange for value commensurate to the good or service tendered. A good company can protect you when inflation attacks by raising the prices of its goods or services so that it receives the same value as it did before. The well-known example is a candy bar that costs a dollar today cost a nickel in the 1950s. A great company can grow over time, providing more goods and services to the world for more value. Ownership in a good company is an opportunity to both protect against and even beat inflation. That is the key and that is why over time it is a better idea to own stocks than gold. Here's something of a common-sense test: name a family fortune and you'll usually find a company behind it. Now name me a gold-hoarder in the Forbes 400. Warren glosses over the bad here, that you could buy a stock representing ownership in a poorly managed or even fraudulent company. You could buy a chunk of fool's gold, but you wouldn't be a fool for long. People held onto Enron stock for ten years after Fastow started his shenanigans. Certainly the bad or fraudulent companies detract from stock performance in the aggregate. But a major index does a pretty good job of protecting you against this precisely because of survivorship bias. A company does not become one of the top 500 largest in the US by being poorly run or providing no value to its customers. A few frauds make it but there's so much scrutiny at the top, they don't (or shouldn't) last long. The S&P 500 is a pretty good proxy for the creme de la creme of businesses and that's why it's such a successful measure. Owning it also offers you the opportunity to grow your wealth with the expanding real value of the economy, beyond the level of inflation. Now if we turn back on the animal spirits, timing matters. Buffet knows this. He's one of the best market-timers out there. Buffett would not have written this article in 1999 even if the precepts were all the same because he knew that it was a bad time to buy stocks and he would get blamed for the people that misunderstood his advice. He wouldn't write this article in 2008 either because he knew then that bonds were actually a great deal (as he points out). He's publishing this article now (even though it's somewhat of a timeless truth) because he thinks stocks are pretty cheap and the alternatives are terrible.
Schultzy 15y ago
Mr. Buffett, like a lot of people, mischaracterizes gold as an investment. It is not. Gold is a store of wealth, not a tool realizing future gains (although that may happen). It is disingenuous to compare gold to stocks, or even to farmland as Buffett does. When you buy land, it doesn't miraculously produce crops (wealth) for you, you must input labor and resources (money) first. I know this is nothing new, but investing in yourself through education is far and away the best investment out there. Governments, thieves, natural disasters and who knows what else can seize or destroy your stocks, bonds, gold, and land, but they can never touch your knowledge and experience. Even if you loose all of your possessions, you can use what you know to reacquire them. If the goal is "preserve AND grow" wealth, educating yourself is the best investment.
- zecho 15y ago
  The labor part is his whole point. Gold has little to no utility ("...some industrial and decorative utility"), but land can be used to build more wealth ("A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops"). He absolutely prefers actual production over mere investment in trends. "More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date." This whole philosophy is at the heart of nearly all of his letters to investors and other writings.
Aloisius 15y ago
Warren Buffet is a value investor. He buys stocks that he sees as fundamentally undervalued during a bear market and sells them when they are overpriced later. If you try to value gold objectively (its industrial and possibly jewelry use), its price should be significantly lower than what it is today. Speculation and paranoia have driven its price to amazing heights. A value investor can't touch gold with a 10 foot pole. I know Hacker News has its share of gold bugs and libertarian survivalists preparing for the fall of the US government. My only recommendation for you all is to remember to leave a map to your buried gold in case you die unexpectedly. For those who don't think the fall of civilization will come within their lifetime (which I hope is the majority of you), trying to match the market with a heavy diversification of stocks/ETFs and bonds (notably US government bonds), a long time horizon and a yearly re-balancing is probably a better bet.
- shingen 15y ago
  Gold is priced in dollars. If the dollar loses real value, gold goes up. It's the same reason oil is $100, its baseline price is getting set ever higher, because it's priced in dollars. Price oil in silver or gold and you'll see that oil hasn't gone up in price, the dollar has gone down. It's not paranoia or speculation primarily driving the price increase, but the objective destruction of value represented in what a dollar can buy today versus, say, 12 years ago.
  - Aloisius 15y ago
    I know you're heavily invested in gold, but what you say is simply not true. The Gold-Oil ratio has fluctuated from upwards of 36:1 to 1:8 over the past 40 years. Further, if it were true then in 2009 when oil plunged from $140 to $50 a barrel, the value of the dollar should have shot up significantly. When gold dropped 20% last year, there wasn't a corresponding increase in the purchasing power of my dollar. You only have to look as far as the sleazy companies selling gold to old people on tv and charging 20-30% markups to know that speculation is driving this market.
    - shingen 15y ago
vimalg2 15y ago
Summary: Gold is Insurance, not Investment(especially after inflation kicks in). It's probably a good idea to have some % asset allocation for this class of holdings, for the various Doomsday scenarios. That... and a cellar stocked with lots of tinned food.
vimalg2 15y ago
Since Indians are notorious Gold bugs historically, this piece by an Indian Investment Blogger is relevant and illustrates several popular misconceptions with data. Oh, and Graphs. http://www.jagoinvestor.com/2012/01/gold-price-movements-analysis.html http://www.jagoinvestor.com/2012/01/gold-price-movements-ana...
parfe 15y ago
If you buy 16 ounces of gold then you have a pile of metal. 5, 10, 20 or 50 years from now it'll still be a one pound pile of metal. Bonds essentially offer the same deal, only you trade a pile of money now for a slightly larger pile of money in the future. Investing in stocks however buys a piece of a growing entity. You buy stock now and the company buys a tractor, a truck, a robotic assembly line, researches some new polymer, hires staff, invests in its own growth and actually produces goods. As time goes on the company is always trading in current dollars. Of course there is risk, but If I buy gold now I'm only ever going to own that much gold in the future and the price is entirely based on some other gold-buyer willing to buy a hunk of metal to sit on himself. Buffet says it better right in the article though which I think people here failed to address. "Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk."
- saalweachter 15y ago
  Technically you'll have 1.33 pounds of metal :-) (Precious metals are typically measured in Troy ounces; there are 12 Troy ounces to the Troy pound.)
  - parfe 15y ago
    Technically, I could still buy 16oz of gold and have a pound... So I officially declare all my metaphorical gold is measured in international avoirdupois ounces. Which I learned about thanks to Wiki University. Thanks.
RockyMcNuts 15y ago
I ran some numbers, and gold seemed to add value to most portfolios over the last 83 years, with modest real return and low correlation with other assets. (Of course, it was legally problematic to own in large quantity in the US for a large part of that period, although you could own jewelry etc.) The last 30 years of disinflation, stable growth were not a good time to own gold. http://blog.streeteye.com/blog/2012/01/gold-as-part-of-long-run-asset-allocation/ http://blog.streeteye.com/blog/2012/01/gold-as-part-of-long-... http://blog.streeteye.com/blog/2012/01/are-long-term-asset-class-relationships-stable/ http://blog.streeteye.com/blog/2012/01/are-long-term-asset-c...
outside1234 15y ago
This is a great article. I wish he had explained three things in more detail: 1) that you can only count on this over longer timeframes (15+ years) 2) his argument assumes an inflationary environments (versus a deflationary environment like Japan and Europe) 3) if you don't have the skills to read a Exxon Mobile or Coca Cola income/balance sheets once a quarter and find it fun you should invest in index ETFs. These three things are why average investors should have a mix of stock and bond index funds in their portfolio that is based on their timeline. Shameless plug: I'm bootstrapping a startup to help average investors manage their portfolios. If you are interested in getting started with or managing an existing index oriented asset allocation investment plan, I'd love to help you at https://azul.io https://azul.io (free of charge to folks signing up before I get Stripe integrated)
mkramlich 15y ago
Any discussion involving gold unfortunately brings out the loons.
chernevik 15y ago
Disagreeing with Buffett is an express ticket to Looking Stupid. But. As Buffett notes, gold demand is an index of fear. And yes, generally returns on gold reflect the extent of fear. Were this the only return case, the whole thing would be subject to tautological collapse. But it's not the only return case. Sometimes fears come true. Governments debase or revalue currencies, regimes collapse entirely, equity assets are appropriated. (Anyone care to guess what happens if foreign investor interests in the Chinese stock market collide seriously with vital state interests?) In these edge cases, gold is one of the few assets that carries value across the transition. To which comes the reply, if the U.S. government falls you'll have worse problems than asset preservation. Certainly true. But when those problems get resolved, asset preservation will work its way back up the priorities. It strikes me as lousy investment vehicle -- but I think it's a mistake to dismiss its political and economic importance entirely because it doesn't make sense in our particular context. The whole point of its importance is its commentary on that context.
lmkg 15y ago
SO I was recently trying to figure out why Bitcoins could be considered a rational investment (sorry to bring up that dead horse again =P). Much to my surprise, I realized that reasons for investing in them are much the same as the reasons for investing in gold. * Relatively stable, predictable supply over time * Not controlled or regulated by any institution or central authority (government or otherwise) * Value determined entirely by market * Will not decay or collapse: you can bury it for 1,000 years, dig it up, and it will be valid and unchanged * Value not tied to the utility of an underlying asset[1] For both gold and bitcoins, that last bullet point is both the cause of all their advantages, and the source of all their criticisms. By all rational analysis, bitcoins should be valueless and gold should be much cheaper. They don't do anything but sit there, unchanged. However, this resilience against outside factors is what makes them eligible as an "apocalypse-proof" investment. In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened. The lack of underlying utility is the criticism that Warren Buffet makes of gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow, think "this is stupid," and stop spending so much money on gold. Bitcoin is 100% speculative. People will need food and electricity tomorrow, but they won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has remained and in fact increased over time. For my part, I find both gold and bitcoins to be irrational investments and I am annoyed that they cost as much as they do. Nonetheless, other people's actions may make them rational investments. [1] Technically, there is a physical asset underlying gold with some utility, but I believe its market value is primarily determined by its investment value and not the underlying asset.
- javert 15y ago
  In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened. I'm not so sure that works. With gold, it was not the case that everyone just "agreed to agree" that it was valuable. Rather, gold was valued independently of its "investment value" due to its use as a status symbol/decoration/jewelry. Likewise, because of that, there's no risk of everyone suddenly "disagreeing" that it's valuable, causing a huge collapse. With bitcoin, it's unclear to me that there is a way to either bootstrap this "agreement" in the first place, or to sustain it.
brazzy 15y ago
Nitpick: there's one clearly false statement Buffet makes: The second major category of investments involves assets that will never produce anything, [...] Tulips, of all things, briefly became a favorite of such buyers in the 17th century. Tulips actually produce something - more tulips. It's actually quite possible that the bulb of a rare and especially pretty tulip variety could be a sound investment for someone intending to grow tulips. And that's how the Dutch tulip mania started out (though it then did proceed to truly bizarre excesses).
JoyxBen 15y ago
He says: 'Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle ... Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot.' But how many companies have ever survived for centuries? Yes, centuries from now there still will be companies producing goods and services, but they are highly unlikely to be the same companies you put your money in. E.g: 'The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University.' 'Professor Foster estimates that by 2020, more than three-quarters of the S&P 500 will be companies that we have not heard of yet.' http://www.bbc.co.uk/news/business-16611040 http://www.bbc.co.uk/news/business-16611040

181 points by DVassallo 15y ago

Buffet: "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." Buffet implicitly rejects global warming here, specifically the latest projections on drought: http://earlywarn.blogspot.com/2012/01/another-terrifying-drought-paper.html http://earlywarn.blogspot.com/2012/01/another-terrifying-dro... and others.

MikeCapone 15y ago
I don't think he's rejecting anything, just making a general point about investing in something with cashflow (a business, farmland) vs speculating in something that is only worth what others will pay for it (gold, commodities)
- spenrose 15y ago
  Did you follow the link? Buffet's recommendation comes with a long time horizon, and the asserion that he can predict stability: "Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle." I think he's right about people, but in the statement he is also implicitly asserting that peanuts will be a cheap commodity in 100 years. That rejects our best projections regarding climate change. The much more important implicit assertion I quoted in the downvoted post (thanks guys) is that you can buy productive farmland now that will be productive in a century. That will only be generally true if climate change does not happen.
  - Czarnian 15y ago
    I'd be willing to bet that when he wrote that sentence, global warming was one of the furthest things from his mind. Even so, I'm pretty sure Warren Buffett is a businessman, not a climate scientist. It's called the Appeal to False Authority, look it up.
  - MikeCapone 15y ago
    I've been following Buffett for a long time. I've read all of the BErkshire letters and most of the partnership letters. I've read 2 biographies of him and watched and read dozens of interviews. He was making a general abstract point, not a specific prediction. That's just the way he talks, and maybe it could be confusing if you are not used to it, but that still what it is. And btw, MidAmerican Energy, a Berkshire owned utility, is the biggest investor in wind power in the US and just bought huge solar power projects.
delinka 15y ago
You seem to implicitly reject the human ability to adapt. We'll find a way to adapt to the changing environment. Hell, we might even adapt our habits (ha!) and allow the environment to correct itself. Regardless of the plausibility of global warming, 400 million acres of farmland will still produce more value in crops than you could shake your investment stick at.
- spenrose 15y ago
  No, I read very smart people who try to analyze what it would take to adapt, and they range from deeply concerned to terrified. Start here: http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/ or here: http://earlywarn.blogspot.com/
tomjen3 15y ago
Honestly (and regardless of the actual value of global warming) the projections have changed so much and are so impossible to nail down exactly that they might as well be read in tea leafs. And if we get draught, what do you think the farmers will do? irregate their fields.
- spenrose 15y ago
  For "changed" please substitute "have gotten more specific, more grim, and better corroborated." WRT irrigation, we lack enough water now on a global scale.
  - tsotha 15y ago
    >For "changed" please substitute "have gotten more specific, more grim, and better corroborated." That's not true at all. If anything the last decade has shown the data and models are woefully inadequate for prediction.
argv_empty 15y ago
Global warming is a red herring here. No matter how hard food production gets, it will remain a value-creating activity as long as there are people (if you don't believe me, then stop eating).
hnal943 15y ago
So you believe global warming is going to end life as we know it. How does that change your investment strategy?

ericdykstra 15y ago

Same conclusion from a slightly different angle: You trade risk for expected payout. Imagine each of these scenarios is like flipping coins with different values attached. At the end of the year, you flip one coin: - Bonds: Heads, you gain 1%. Tails, you gain 1%. If it lands on it's side, you lose everything (government default) - Stocks: Heads, you gain 15%. Tails, you lose 10%. A lot more risk here, but the expected value of flipping the coin is higher. Some people would rather flip the bonds coin, some would rather flip the stocks coin, and it depends on the individuals' risk tolerance. Gold doesn't fit the model, because buying gold is speculation rather than an investment.

Wilduck 15y ago
I think this is miss-representing Buffett's position here. First off, he explicitly states that the riskiness of an asset should not be measured by its volatility: > Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk. He goes on to describe what sorts of investments he thinks are worthwhile. Namely investments in assets that will continue to be productive in the long term. > Investment in productive assets, whether 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. Again, this isn't framed in terms of risk. Probably because with a diversified portfolio the risk is not at all analogous to flipping a coin (there is obviously still risk, but it's not that simple). Instead, it's framed as current versus future consumption. As for gold, I don't think he frames it in terms of speculation versus investment at all. Buffett recognizes that gold will probably continue to hold value. Instead, he decides to frame the question in terms of whether gold is a productive asset. It isn't. It will just sit there. > You can fondle the cube, but it will not respond.
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illumin8 15y ago
Stock indexes are more like: heads you gain 10% (average year), tails you lose 50% (every 5-10 years).

klochner 15y ago

He omits the only valid reason any non-speculator would own gold - it holds it's value through times of political turmoil - holds it's value over millenia rather than decades or centuries. A coup d'etat may result in seizure of private companies, rendering your stock worthless, but not touching the value of gold. It would be speculating to put all your assets into gold, but a small amount is like an insurance policy. relevant: http://www.csmonitor.com/World/Americas/2011/1105/Hugo-Chavez-looks-to-take-Venezuela-s-private-Los-Roques-paradise-public http://www.csmonitor.com/World/Americas/2011/1105/Hugo-Chave... Government expropriation of private industry has been a key policy of Chávez's regime. More than 450 companies have been expropriated this year alone. ExxonMobil, which had its assets seized in 2007, is still fighting the Venezuelan government for $7 billion in compensation it believes it is owed.

mikeash 15y ago
An unstable government could just as easily seize your gold. What investor cares about millennia? Centuries is already too much, unless you're vastly more concerned about your great great great grandchildren than most people. 100 years is probably the absolute largest possible upper limit for a real investor to care about, and typically it's much less still.
- dmm 15y ago
  I think he was talking about a small amount of gold. Twenty-thousand dollars worth could fit in your hand and easily be smuggled in clothes, luggage, etc. That's pretty handy if you had the flee the country from nazis(or whatever) that have stolen all of your other assets. Admittedly that's a pretty unlikely scenario.
  - cube13 15y ago
    It's even more unlikely because you then have to find a buyer that's willing to pay market price for the gold wherever you end up at. You'll be reduced to selling it for whatever people are willing to pay.

shingen 15y ago

He's wrong. Stocks do not beat gold once inflation outpaces the rate of average market returns, which is exactly where we're at now. Gold is up 87 fold over 90 years or so. There is no way to capture that kind of return out of stocks, other than to buy one stock, Apple at the absolute bottom, or buy Dell the day it IPO'd or other similar freak scenarios, and then hold all the way through, and then sell at the absolute top. On a long term duration, it becomes increasingly difficult to survive even modest inflation and market changes (you have to constantly shift your investment strategies for all sorts of reasons: age, family, economic conditions, and so on). Few people are skilled enough to do that well. With gold, you merely need to buy and hold - IF you believe the fiat currency will continue to depreciate due to 'printing' (to pay for entitlements, to devalue national debt, to fund deficits, and so on). There are very few things you could leave for your grandchildren that will retain their value, real estate and gold are two prime options. If you had bought and held the stocks that make up the Dow over 60 or 70 years, you'd have gotten demolished because the Dow constantly shuffles its index. That is to say, you can't look at the Dow from 70 years ago and compare it to today, because the index is completely different, and the average investor could only easily purchase index ETFs in the last 30 or so years. In reality, the Dow is not at 13,000 today as we knew 13k to be back in 1998/99 during the huge stock market bubble. Inflation has eroded that nominal value by at least half. The Dow is more likely at 5,000 to 6,500 depending on what you believe real inflation has been over the past 14 years (not the Fed's bogus CPI numbers). The dollar has lost 97% of its value since the Fed came into existence. There's no way you can outrun that unless you hit homeruns in the stock market, which is what Buffett did, and which is exactly what your average investor cannot do regularly. The majority of people that invest in the stock market lose money. That's tracking since the late 1960s when the US went off the gold standard and inflation skyrocketed (sending oil, gold, and nearly everything radically higher). Buffett hasn't made most of his wealth in the stock market anyway (nor that of Berkshire). He has made it by using insurance company float cash to purchase other high float companies, and then rolling that ball forward. Nearly all of his big market gains peg to one period of time, the 1970s, when stocks were once-in-a-generation cheap; his timing was brilliant, but it was an exceedingly rare scenario.

dman 15y ago
Are you taking dividend yields into account?

ef4 15y ago

His basic point is almost a tautology. Yes, it's great to own productive assets. The real trick is predicting which ones will really stay productive over the long term. Just buying a broad index is often not a winning strategy when you factor in the taxes, inflation, and survivor bias. Certainly Buffet hasn't just bought a broad index -- he makes highly targeted investments. And he glosses over a basic point that I've seen many commenters miss. An asset like gold behaves differently under bubble conditions than an asset like a tech stock, tulip, or house. The production of those things is price elastic, and rising prices cause rising production that ultimately crashes the bubble. But expanding the supply of gold available for trade by more than a couple percent a year simply isn't feasible. This is precisely why markets have repeatedly chosen it as a form of money. Of course this means the market for gold is driven purely by demand sentiment, and of course demand could crash. But this is true of every currency -- it's only valuable because it's valuable.

jtbigwoo 15y ago
An asset like gold behaves differently under bubble conditions than an asset like a tech stock, tulip, or house. The production of those things is price elastic, and rising prices cause rising production that ultimately crashes the bubble. The number of new home sales at the top of the bubble was about 1.4 million/year vs. existing housing stock of over 70 million. That's less than a 2% increase per year, not counting the thousands of home that are demolished each year. Vast new production isn't required for a bubble.
dwc 15y ago
The real trick is predicting which ones will really stay productive over the long term. Just buying a broad index is often not a winning strategy when you factor in the taxes, inflation, and survivor bias. Certainly Buffet hasn't just bought a broad index -- he makes highly targeted investments. This depends on how high you set the bar. If you're trying to be Warren Buffet then buying a broad index obviously won't get you there. With the bar set somewhere in the neighborhood of "I'd like to protect and increase the buying power of my money" then buying something like SPY starts looking a lot better, even with taxes and inflation taken into account.

seanalltogether 15y ago

"Can you imagine an investor with $9.6 trillion selecting pile A over pile B?" No, but most people aren't investors, they're just people with a small amount of money buying pieces of paper from each other to gamble over which company is most attractive.

kahawe 15y ago

In the 90s everyone rushed the IT shares and then the dotcom bubble burst. In the first decade of our new millennium, real estate and all sorts of weird financial products somehow building on real estate were THE best way to invest money because nothing can happen, you have a house standing right there, right?? Then that bubble burst. Now, you'd think people would have learned by now but no... sure as hell now everyone rushes to buy gold and silver because "hey what could possibly happen"??? Even one of my colleagues who has been burned both times on dotcom shares and some shady real estate thingy in east-germany, no less, now religiously swears by gold and silver because what could possibly happen? People seem to really not be able to grasp that it is just another market.

rubashov 15y ago
> everyone rushes Who is rushing to buy gold? I'd be surprised if more than 1% of households have meaningful gold exposure.
- Symmetry 15y ago
  I'd be surprised if more than 1% of household had actually held tech stocks in 2000, also.
- InclinedPlane 15y ago
  Look at this graph: http://blog.thomsonreuters.com/wp-content/uploads/2011/04/GLD_INF0411_SB.jpg http://blog.thomsonreuters.com/wp-content/uploads/2011/04/GL... Is that the sign of an investment that keeps growing in value steadily across the ages or merely the sign of a speculative bubble about to burst? Hint: look at the late 70s as well.
  - illumin8 15y ago
    Have you considered that the chart merely shows the value of gold in US dollars, and that it could be, this time, that the US dollar is the speculative bubble that has been bursting for some time now.

mutant 15y ago

Lets listen to the jailer tell the inmates that shackles are better than manacles.. grabs popcorn

Cushman 15y ago

Imagine if gold were a company. Friend: "Hey man, you gotta get in on this— this stock has gone up 30% in the last year! Nowhere to go but up!" You: "Wow, that's amazing! What does it do?" Friend: "Um... it doesn't corrode?"

smokeyj 15y ago
Imagine if the USD were a company. Friend: "Hey man, you gotta get in on this— this stock has gone down 30% in the last year! Nowhere to go but down!"
- phillmv 15y ago
  … Which is why Buffet also says he doesn't like currency denominated assets.
- aqme28 15y ago
  Currency is a terrible way to invest. Nobody is arguing that.
  - smokeyj 15y ago
    Not if that currency is gold. Unless, you don't like turning profits of course.
    - Steko 15y ago
      We got it you like gold. Warren Buffet doesn't. I'll take his advice over yours.
    - william42 15y ago
      When is the last time that you purchased a product or service using gold?
- william42 15y ago
  Hint: the value of USD isn't as an investment. In fact, if the value of USD goes up, that makes it less useful, because the point of having money is to spend it. For example, one of the many reasons of the utter trainwreck of Bitcoin is the fact that more people were holding it as speculation than actually using it to purchase anything. And it's only 3% in the last year if you aren't trying to compare it to something mid-bubble. The USD is totally going down with respect to tech stocks, guys!

DannoHung 15y ago

Man, you'll never be able to convince gold bugs it's a bad idea. Shit's just too shiny.

tnuc 15y ago

Warren Buffet once wrote about gold... It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

jrockway 15y ago
Gold has utility: it easily forms a plating on other metals, and conducts electricity even when continuously exposed to air. This is not true of many other metals, hence the popularity of gold-plated electronic interconnects.
- brown9-2 15y ago
  But is that utility that you mention the reason why people bury it again and pay people to stand around guarding it? Gold may have some utility and practical applications but that does not seem to account for all of it's perceived value.
  - deleted 15y ago
    [deleted]
- lmkg 15y ago
  This is exactly why I hate it so much when people use gold as an investment instrument. Gold would be useful, except its price is high and its supply is low, because people purchase it with the sole intent of not doing anything with it.
- aqme28 15y ago
  I'd need to find the statistic again, but it's something like 15% of the value of gold is due to its utility, and the rest is due to it being shiny/historically valued
  - Steko 15y ago
    50% jewelry (half to india), 40% investment, 10% industrial

jpdoctor 15y ago

The fact that Warren is on the hook for several billion dollars of S&P puts is mentioned nowhere in the article. When O When are reporters going to understand conflict-of-interest?

hodder 15y ago
Do you honestly believe that Warren is trying to deceive you into investing in productive assets rather than a shiny metal because he wants to manipulate the market?
- jpdoctor 15y ago
  Do you honestly believe he is not talking his book?
- reedlaw 15y ago
  I believe that his speculation argument against gold holds for the stock market as well. Investors create feedback loops when they buy stocks that then creates even more demand. Buffet believes in the S&P and so he will naturally encourage others to do so.
  - kyrsey 15y ago
    The value of anything can be propped up by speculation, what varies is the value which can be maintained without speculation (e.g., in cases where the bubble bursts). I think this is the use of discriminating among (A) resources reasonably expected to decline in value, (B) resources expected to 'hold value' modulo speculation, (C) resources expected to have ongoing returns with or without speculation.
shahan 15y ago
It's Warren Buffett, man. Perhaps he invests (long-term) in stocks because he believes what he writes, rather than writes what he does because he just happens to be invested in stocks. You really think there should be a disclaimer here?
zotz 15y ago

ww520 15y ago

Buffett is great at picking stocks. The problem with his statement is that he is a professional stock investor but we mere mortals are not. We have our busy lives other than watching the market. For us, the correct strategy is to do balanced portfolio with 50/50 :: stock/bond, or some other ratio.

iy56 15y ago
Paying someone like him a fee to choose stocks for you seems like a much better strategy to me.
- yannickt 15y ago
  The challenge is identifying "someone like him" before the fact. But if you could do that, then you would know why he's been so successful and you'd be able to do it all by yourself. Most funds do not beat the market in the long term (> 10 years) after costs, and for the same asset allocation, someone who just invests in the market (e.g. through low-cost index funds) will do much better than the average professional manager.
  - iy56 15y ago
    Investing money produces measurable results. It is possibly to verify that someone is a successful investor without knowing why he is successful.
    - yannickt 15y ago
      The only thing you can measure is past performance. In investing, past success is not a guarantee of future long term success. Long Term Capital Management had two Nobel laureates among its partners. The fund was extremely successful in its first few years (~40% yearly return with little volatility), but then lost over four billion in just a few months, and eventually closed.
      - iy56 15y ago

nonsequ 15y ago

I don't think that Buffett is saying that stocks, at any given point in time, will deliver you better returns over a given time period than gold or bonds. He quite clearly notes that there are times when bonds are beaten up and they'll offer a great return. Buffett, being a virtuoso, variously reaps returns from derivative contracts, insuring sweepstakes prizes, and solar farms. He once bought a boatload of silver and tried to corner the market. He won't argue with you that with all of these there's a right time. That's because all of these asset classes are subject to 'animal spirits.' Stocks went through the tech bubble. At various times bond yields have been too low when judged against the real risk that you do not get your principal back in full. Bond yields are pretty darn low right now. Gold may seem invincible now and it may seem that the world is only going to continue falling apart and Helicopter Ben is only going to keep running the presses, but don't you remember a time when stocks did nothing but go up? Or when people thought that house prices would never go backward? All of these asset classes are also subject to the 'invisible tax' of inflation. As the money supply increases, all currency is devalued and everything that's denominated purely in currency loses value as well. To preserve and grow wealth, you must first beat inflation. Stack the assets up against each other on these merits and I think that's where his logic lies. Let's remove 'animal spirits' for now. Look at these asset classes dispassionately for what they represent. Ignore prices, what they've done in the past, where they are now. Bonds are contracts for loaning currency. You as the lender demand repayment of your principal and interest payments concordant with the risks you take that the money does not come back to you. Most bonds as structured do not protect you from inflation unless your nominal payout is explicitly pegged in the contract (as with TIPS). You pay today's currency for a fixed amount of tomorrow's currency and if that currency is worth less (as it probably will be) you're out of luck. Gold is a real good. It's a particularly nice real good in that it's malleable and somewhat plentiful but both difficult to destroy and difficult to make more of. Oh and it's shiny. Everybody agrees that gold is an excellent real good in that way. Those factors, particularly that it's difficult to make more of, protect you from inflation. The real value should stay the same so the price of gold increases as inflation brings currency down around it. Gold beats inflation for sure (except maybe for the bit of mining and new discoveries that get done). Stocks represent ownership in companies. A company is a group of people operating capital assembled to provide a good or service to others in exchange for value commensurate to the good or service tendered. A good company can protect you when inflation attacks by raising the prices of its goods or services so that it receives the same value as it did before. The well-known example is a candy bar that costs a dollar today cost a nickel in the 1950s. A great company can grow over time, providing more goods and services to the world for more value. Ownership in a good company is an opportunity to both protect against and even beat inflation. That is the key and that is why over time it is a better idea to own stocks than gold. Here's something of a common-sense test: name a family fortune and you'll usually find a company behind it. Now name me a gold-hoarder in the Forbes 400. Warren glosses over the bad here, that you could buy a stock representing ownership in a poorly managed or even fraudulent company. You could buy a chunk of fool's gold, but you wouldn't be a fool for long. People held onto Enron stock for ten years after Fastow started his shenanigans. Certainly the bad or fraudulent companies detract from stock performance in the aggregate. But a major index does a pretty good job of protecting you against this precisely because of survivorship bias. A company does not become one of the top 500 largest in the US by being poorly run or providing no value to its customers. A few frauds make it but there's so much scrutiny at the top, they don't (or shouldn't) last long. The S&P 500 is a pretty good proxy for the creme de la creme of businesses and that's why it's such a successful measure. Owning it also offers you the opportunity to grow your wealth with the expanding real value of the economy, beyond the level of inflation. Now if we turn back on the animal spirits, timing matters. Buffet knows this. He's one of the best market-timers out there. Buffett would not have written this article in 1999 even if the precepts were all the same because he knew that it was a bad time to buy stocks and he would get blamed for the people that misunderstood his advice. He wouldn't write this article in 2008 either because he knew then that bonds were actually a great deal (as he points out). He's publishing this article now (even though it's somewhat of a timeless truth) because he thinks stocks are pretty cheap and the alternatives are terrible.

Schultzy 15y ago

Mr. Buffett, like a lot of people, mischaracterizes gold as an investment. It is not. Gold is a store of wealth, not a tool realizing future gains (although that may happen). It is disingenuous to compare gold to stocks, or even to farmland as Buffett does. When you buy land, it doesn't miraculously produce crops (wealth) for you, you must input labor and resources (money) first. I know this is nothing new, but investing in yourself through education is far and away the best investment out there. Governments, thieves, natural disasters and who knows what else can seize or destroy your stocks, bonds, gold, and land, but they can never touch your knowledge and experience. Even if you loose all of your possessions, you can use what you know to reacquire them. If the goal is "preserve AND grow" wealth, educating yourself is the best investment.

zecho 15y ago
The labor part is his whole point. Gold has little to no utility ("...some industrial and decorative utility"), but land can be used to build more wealth ("A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops"). He absolutely prefers actual production over mere investment in trends. "More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date." This whole philosophy is at the heart of nearly all of his letters to investors and other writings.

Aloisius 15y ago

Warren Buffet is a value investor. He buys stocks that he sees as fundamentally undervalued during a bear market and sells them when they are overpriced later. If you try to value gold objectively (its industrial and possibly jewelry use), its price should be significantly lower than what it is today. Speculation and paranoia have driven its price to amazing heights. A value investor can't touch gold with a 10 foot pole. I know Hacker News has its share of gold bugs and libertarian survivalists preparing for the fall of the US government. My only recommendation for you all is to remember to leave a map to your buried gold in case you die unexpectedly. For those who don't think the fall of civilization will come within their lifetime (which I hope is the majority of you), trying to match the market with a heavy diversification of stocks/ETFs and bonds (notably US government bonds), a long time horizon and a yearly re-balancing is probably a better bet.

shingen 15y ago
Gold is priced in dollars. If the dollar loses real value, gold goes up. It's the same reason oil is $100, its baseline price is getting set ever higher, because it's priced in dollars. Price oil in silver or gold and you'll see that oil hasn't gone up in price, the dollar has gone down. It's not paranoia or speculation primarily driving the price increase, but the objective destruction of value represented in what a dollar can buy today versus, say, 12 years ago.
- Aloisius 15y ago
  I know you're heavily invested in gold, but what you say is simply not true. The Gold-Oil ratio has fluctuated from upwards of 36:1 to 1:8 over the past 40 years. Further, if it were true then in 2009 when oil plunged from $140 to $50 a barrel, the value of the dollar should have shot up significantly. When gold dropped 20% last year, there wasn't a corresponding increase in the purchasing power of my dollar. You only have to look as far as the sleazy companies selling gold to old people on tv and charging 20-30% markups to know that speculation is driving this market.
  - shingen 15y ago

vimalg2 15y ago

Summary: Gold is Insurance, not Investment(especially after inflation kicks in). It's probably a good idea to have some % asset allocation for this class of holdings, for the various Doomsday scenarios. That... and a cellar stocked with lots of tinned food.

vimalg2 15y ago

Since Indians are notorious Gold bugs historically, this piece by an Indian Investment Blogger is relevant and illustrates several popular misconceptions with data. Oh, and Graphs. http://www.jagoinvestor.com/2012/01/gold-price-movements-analysis.html http://www.jagoinvestor.com/2012/01/gold-price-movements-ana...

parfe 15y ago

If you buy 16 ounces of gold then you have a pile of metal. 5, 10, 20 or 50 years from now it'll still be a one pound pile of metal. Bonds essentially offer the same deal, only you trade a pile of money now for a slightly larger pile of money in the future. Investing in stocks however buys a piece of a growing entity. You buy stock now and the company buys a tractor, a truck, a robotic assembly line, researches some new polymer, hires staff, invests in its own growth and actually produces goods. As time goes on the company is always trading in current dollars. Of course there is risk, but If I buy gold now I'm only ever going to own that much gold in the future and the price is entirely based on some other gold-buyer willing to buy a hunk of metal to sit on himself. Buffet says it better right in the article though which I think people here failed to address. "Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk."

saalweachter 15y ago
Technically you'll have 1.33 pounds of metal :-) (Precious metals are typically measured in Troy ounces; there are 12 Troy ounces to the Troy pound.)
- parfe 15y ago
  Technically, I could still buy 16oz of gold and have a pound... So I officially declare all my metaphorical gold is measured in international avoirdupois ounces. Which I learned about thanks to Wiki University. Thanks.

RockyMcNuts 15y ago

I ran some numbers, and gold seemed to add value to most portfolios over the last 83 years, with modest real return and low correlation with other assets. (Of course, it was legally problematic to own in large quantity in the US for a large part of that period, although you could own jewelry etc.) The last 30 years of disinflation, stable growth were not a good time to own gold. http://blog.streeteye.com/blog/2012/01/gold-as-part-of-long-run-asset-allocation/ http://blog.streeteye.com/blog/2012/01/gold-as-part-of-long-... http://blog.streeteye.com/blog/2012/01/are-long-term-asset-class-relationships-stable/ http://blog.streeteye.com/blog/2012/01/are-long-term-asset-c...

outside1234 15y ago

This is a great article. I wish he had explained three things in more detail: 1) that you can only count on this over longer timeframes (15+ years) 2) his argument assumes an inflationary environments (versus a deflationary environment like Japan and Europe) 3) if you don't have the skills to read a Exxon Mobile or Coca Cola income/balance sheets once a quarter and find it fun you should invest in index ETFs. These three things are why average investors should have a mix of stock and bond index funds in their portfolio that is based on their timeline. Shameless plug: I'm bootstrapping a startup to help average investors manage their portfolios. If you are interested in getting started with or managing an existing index oriented asset allocation investment plan, I'd love to help you at https://azul.io https://azul.io (free of charge to folks signing up before I get Stripe integrated)

mkramlich 15y ago

Any discussion involving gold unfortunately brings out the loons.

chernevik 15y ago

Disagreeing with Buffett is an express ticket to Looking Stupid. But. As Buffett notes, gold demand is an index of fear. And yes, generally returns on gold reflect the extent of fear. Were this the only return case, the whole thing would be subject to tautological collapse. But it's not the only return case. Sometimes fears come true. Governments debase or revalue currencies, regimes collapse entirely, equity assets are appropriated. (Anyone care to guess what happens if foreign investor interests in the Chinese stock market collide seriously with vital state interests?) In these edge cases, gold is one of the few assets that carries value across the transition. To which comes the reply, if the U.S. government falls you'll have worse problems than asset preservation. Certainly true. But when those problems get resolved, asset preservation will work its way back up the priorities. It strikes me as lousy investment vehicle -- but I think it's a mistake to dismiss its political and economic importance entirely because it doesn't make sense in our particular context. The whole point of its importance is its commentary on that context.

lmkg 15y ago

SO I was recently trying to figure out why Bitcoins could be considered a rational investment (sorry to bring up that dead horse again =P). Much to my surprise, I realized that reasons for investing in them are much the same as the reasons for investing in gold. * Relatively stable, predictable supply over time * Not controlled or regulated by any institution or central authority (government or otherwise) * Value determined entirely by market * Will not decay or collapse: you can bury it for 1,000 years, dig it up, and it will be valid and unchanged * Value not tied to the utility of an underlying asset[1] For both gold and bitcoins, that last bullet point is both the cause of all their advantages, and the source of all their criticisms. By all rational analysis, bitcoins should be valueless and gold should be much cheaper. They don't do anything but sit there, unchanged. However, this resilience against outside factors is what makes them eligible as an "apocalypse-proof" investment. In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened. The lack of underlying utility is the criticism that Warren Buffet makes of gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow, think "this is stupid," and stop spending so much money on gold. Bitcoin is 100% speculative. People will need food and electricity tomorrow, but they won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has remained and in fact increased over time. For my part, I find both gold and bitcoins to be irrational investments and I am annoyed that they cost as much as they do. Nonetheless, other people's actions may make them rational investments. [1] Technically, there is a physical asset underlying gold with some utility, but I believe its market value is primarily determined by its investment value and not the underlying asset.

javert 15y ago
In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened. I'm not so sure that works. With gold, it was not the case that everyone just "agreed to agree" that it was valuable. Rather, gold was valued independently of its "investment value" due to its use as a status symbol/decoration/jewelry. Likewise, because of that, there's no risk of everyone suddenly "disagreeing" that it's valuable, causing a huge collapse. With bitcoin, it's unclear to me that there is a way to either bootstrap this "agreement" in the first place, or to sustain it.

brazzy 15y ago

Nitpick: there's one clearly false statement Buffet makes: The second major category of investments involves assets that will never produce anything, [...] Tulips, of all things, briefly became a favorite of such buyers in the 17th century. Tulips actually produce something - more tulips. It's actually quite possible that the bulb of a rare and especially pretty tulip variety could be a sound investment for someone intending to grow tulips. And that's how the Dutch tulip mania started out (though it then did proceed to truly bizarre excesses).

JoyxBen 15y ago

He says: 'Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle ... Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot.' But how many companies have ever survived for centuries? Yes, centuries from now there still will be companies producing goods and services, but they are highly unlikely to be the same companies you put your money in. E.g: 'The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University.' 'Professor Foster estimates that by 2020, more than three-quarters of the S&P 500 will be companies that we have not heard of yet.' http://www.bbc.co.uk/news/business-16611040 http://www.bbc.co.uk/news/business-16611040