Avoid gold and bonds, says Warren Buffett

By James McKeigue Feb 13, 2012

James McKeigue

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America’s most famous investor, Warren Buffett, has told investors to stay away from traditional ‘safe havens’, such as gold and government bonds, warning that they are more risky than stocks.

The 81-year-old ‘sage of Omaha’ thinks that most money managers don’t know how to judge risk properly, and look at the wrong numbers. "It all boils down to how you define investing", Buffett tells US magazine Fortune.

For Buffett, investing is all about purchasing power – “forgoing consumption now in order to have the ability to consume more at a later date”. Therefore, he measures risk as the reasoned probability of an investment “causing its owner a loss of purchasing power over his contemplated holding period”.

Buffett reckons Wall Street analysts focus too much on volatility, which is irrelevant. “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.”

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Fixed income investments, such as bonds or bank accounts, may appear safe because they are not volatile. But “in truth they are among the most dangerous of assets”. Indeed, notes Buffett, “over the past century, these instruments have destroyed the purchasing power of investors in many countries”. The combination of inflation and taxes mean that long-term holders of government bonds lose the real value of their wealth.

As for gold, Buffett places it firmly in the category of assets “that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future.”

Drawing comparisons with tulips, housing and internet stocks, Buffett notes that “bubbles blown large enough eventually do pop”. (MoneyWeek regular Tim Price vehemently disagrees on this point – you can read Tim’s response to Buffett’s feature in the next issue of MoneyWeek magazine, out on Friday.)

Regular Buffett watchers will be unsurprised to hear that he believes ‘value investing’ is the safest, most profitable investment option. He likes to identify productive assets, such as businesses, farms or real estate, that “have the ability in inflationary times to deliver output that will retain its purchasing-power value”. Favourites include Coca-Cola and IBM.

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Published in Guru watch | More articles by James McKeigue

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  • 1. Chester

    (14 February 2012, 12:17PM)  Complain about this comment

    He is right on many fronts, but assumes that the expansionary growth fuelled by loose credit of the last 30 years will continue

    It won't - deflation is winning the argument with predictable effects on asset prices, so cash and bonds are exactly what he should be holding now. When the cycle turns again, which it will, gold and the assets he has piled into will win the day

    So, if he can wait long enough, his "contemplated holding period" will generate a real return. But he will not be around to see it, and I certainly don't have the luxury of time either, even if I am 30 years younger than Buffet

  • 2. JREwing

    (14 February 2012, 02:51PM)  Complain about this comment

    What has been Buffett's return on investment in the last decade? 5 percent per year? Some believe real inflation is running higher than that. So Buffett has lost money in the last decade in real terms?

  • 3. Stavros

    (15 February 2012, 07:44AM)  Complain about this comment

    Buffett is right about bonds being a bad investment. I would say buying bonds for the next decade will be the best way of losing capital, with interest rates at record lows, there's only one way.

    With inflation not tamed (and the official meaasure seriously understated), even the inflation-linked version (or TIPS in US)-linked to these indices - are a way to lose capital.

    Gold is the only real money, everything else is an illusion, so you must hold gold, and make sure it is physical, and not the "fractional" ETF holdings. It is questionable whether many of these precious metal ETF's actually have all the metal they claim.

  • 4. Segedunum

    (18 February 2012, 01:02AM)  Complain about this comment

    Ahhhh, I see it's started. More people are talking about precious metals and trying to ward people off. When you see that start to happen then you know what to do.........

    You don't purchase gold as some kind of bubble investment in the hope that it will skyrocket in future, although that could happen. You purchase it because when you boil away everything, including the paper money Buffet thinks you sell it for, it is the only thing left that can be used as money. You acquire it to preserve your wealth and maybe maximise it. You can't simply grow more gold as you can tulip bulbs.

    I don't know if Buffet is trying to scare people off precious metals or whether he really doesn't understand the thousands of years of mechanisms behind them.

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