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Same conclusion from a slightly different angle: You trade risk for expected payout. Imagine each of these scenarios is like flipping coins with different value

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
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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).

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

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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).