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Warren Buffett: Why shares will beat gold and bonds

The Oracle of Omaha wrote in an article in Fortune magazine in February about why equities almost always beat the alternatives, Gold and bonds, over time (see Fortune Article 9th Feb 2012).
Firstly, he argues that investments in currency related investments such as bonds and bank deposits are thought of as safe but in truth they are the most dangerous of assets. They are not volatile at all but the risk is huge because they are exposed to the power inflation and its ability to erode real returns. In the last 50 years investors in US Treasuries would have effectively yielded nothing in the way of any real income after taxes and inflation were taken into account. This is particularly true in today’s very low interest rate environment where rates do not come close to offsetting the purchasing power risk that investors assume.
The second class of investments that he examines are those such as gold whose returns are driven by a belief that others will desire it even more avidly in the future and therefore the price will rise. This self-sustaining thesis works for a while but as with all bubbles, must come to an end as the pool of buyers inevitably reduces and the demand for the commodity does as well. All of the world’s gold, 170 tons, would fit in a cube about 20 m wide and be worth about $10 trillion. For that amount of money could buy all be cropland in the US, 16 Exxon Mobils and still have about $1 trillion left over which would generate almost one trillion in income each year. He asks, which bunch of assets would you rather own?
Buffett’s own preference is the third category equities. This includes investment in productive assets, whether businesses, farms, or real estate. His argument as to why they are the most attractive class of assets is as follows:

“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. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).”

This is why Buffett and his investment company Berkshire Hathaway’s first choice for investment assets will always be marketable stocks. They believed that over any extended period of time this category of investing will prove to be the runaway winner amongst the three they examined and more importantly, it will be by far the safest.

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