In a column in Fortune magazine (see Warren Buffett: Why stocks beat gold and bonds), Warren Buffett explained why he prefers stocks over cash, bonds and gold. It is true that cash does not fluctuate in nominal value but its returns are close to zero after one accounts for inflation and taxes. At today’s low yields, he quips that bonds are “priced to deliver return-free risk”. Buffett also pointed out that despite its stellar recent returns, gold has limited uses and does not produce an income stream. Therefore, he says, he prefers stocks to bonds and gold:

My own preference — and you knew this was coming — is our third category: 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. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See’s Candy meet that double-barreled test. 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.

It is interesting to contract Buffett’s enthusiasm for stocks in 2012 with another Fortune column he co-authored in 1999 (see Mr. Buffett on the Stock Market) in which he took a decidedly downbeat tone on stocks. He explained that stocks were so richly priced at that time that investors would be lucky to earn 4% in real terms, which would leave them disappointed with stocks. With so many investors fleeing the stock market these days, those words are now sounding very prophetic.

This article has 6 comments

  1. When I’m lucky enough to have similar thoughts to Buffet’s, he invariably writes much better than I do. If we were to face major financial upheavals in the future, I’d rather be holding a slice of all business activity than cash, bonds, or a hunk of gold. Businesses that make clothes and food will always have value, but the value of cash and bonds can inflate away, and the world-wide spell that makes us value gold could break at some point in the future.

  2. @Michael: Buffett has a real flair for clearly explaining his thoughts. I think he is going to be right about stocks this time as he was in 1999. For more than a decade now, earnings have grown and interest rates have dropped. But since starting valuations were sky high, returns from stocks have been poor. At some point, the headwinds from high valuations will change.

  3. The inflation protection really is the beauty of stock investing.

    What do you think the underlying product undergoing inflationary pressure is? That can of coke will soon cost $1.20, $1.50, $2.00 each.

    • @Sampson: Or take our banks. Mine just sent out a notice of increase for safe deposit fees. It went up from $90 per year to $125. Nice franchises to own even if it’s tough being a customer!

  4. Is he still got the edge in Stocks picking or he is getting old?

    Just saying!


  5. Buffet isnt he the guy that controled one of the rating companies that gave those bogus MBS a good rating.