Warren Buffett "Owning bonds is silly"

[helloyou]

Interesting talk from Warren Buffett:
Becky:
"To the average investor looking at getting a little bit of advice [...] he should be 40% in bonds"

Buffett:
"My family, anybody that I can advice, they are the typical people, they're not super wealthy or anything of that sort. Bear in mind they have the proper attitude and that stock can go down 20% in the next month they are not going to be bothered. I'd have them to have enough cash in hand to be comfortable, and the rest in equities [...]
I'd have producing asset, I'd favour them enormously over fixed dollar investment style. I think it's silly to have some ratio like 30-40 or 50% in bonds. They are terrible investment now!

Bonds are priced artificially, you've got some guys buying them at $85B/month, that would change at some point. And when it changes, people can lose a lot of money if they hold long term bonds"
https://youtu.be/1N3g47P-iRc


As well as Ray Dalio regarding cash and bonds:
"You'd be pretty crazy to own bonds, because what is debt? it's a promise to receive currency... and isn't it clear they're going to print a lot of currency?"

"The central bank has made the bond going to 100x multiples... you put a dollar out and you get your money back in a 100 years.
Don't own bonds, and don't own cash. They produce a lot of debt and producing a lot of money to fund it"
https://www.youtube.com/watch?v=A-noFNHcrlM

I already had intuition that bonds aren't good investment now. But with this talk from Warren Buffett including the multiple interviews from Ray Dalio makes me think I'll not own any bonds and will only keep cash short term.

I've let my parents having a large % of cash, they probably have over 40% in cash and bonds, so I think I need to help them move away from that even though they are 63

[bbqbonelesswing]

Sure. Like any other asset, your concentration in bonds should depend on your goals, risk tolerance, and timeframe. I don't have any bonds but probably will later in life.

[mistymoney]

I've never really been into bonds. Seemed silly when I was struggling financially and retirement wasn't even a pipe dream as yet.

I bought into several bond funds this year as I began to envision actually being able to step away from the w2 job, and I ended up holding them for less than a week. I decided to focus on a "less volatile" portion of my protfolio with dividend stocks and determine what timeline I wanted covered in cash - thinking maybe 2 years right now? Still pondering.

I still haven't fully executed this plan as yet. RE investing in my immediate area is very pricy and doubtfful on cash flow. Not sure how/if I should pursue other areas for RE investment.

Was is clear what Warren meant by producing asset? Did this refer to just stocks per se, or was he eluding to something else? Any elaboration on that? 

[helloyou]

Sure. Like any other asset, your concentration in bonds should depend on your goals, risk tolerance, and timeframe. I don't have any bonds but probably will later in life.

Actually Buffett and Ray Dalio advise to not own any. Better to keep just enough cash to live and put the rest in equities. I'm doing that and plan to keep doing that until old age (would increase cash amount as I get older of course). And planning the same thing for my family portfolio

[helloyou]

I've never really been into bonds. Seemed silly when I was struggling financially and retirement wasn't even a pipe dream as yet.

I bought into several bond funds this year as I began to envision actually being able to step away from the w2 job, and I ended up holding them for less than a week. I decided to focus on a "less volatile" portion of my protfolio with dividend stocks and determine what timeline I wanted covered in cash - thinking maybe 2 years right now? Still pondering.

I still haven't fully executed this plan as yet. RE investing in my immediate area is very pricy and doubtfful on cash flow. Not sure how/if I should pursue other areas for RE investment.

Was is clear what Warren meant by producing asset? Did this refer to just stocks per se, or was he eluding to something else? Any elaboration on that?

Buffett sees stock as a company that produces goods / services. So anything that can produce something, like a farm, real estate to rent, a Shopify website are producing assets.

Most companies, whether they are in the stock market or not, are producing asset (unless shell company for tax purpose). Buffett prefers buying entire companies rather than portion of them actually, but it's often cheaper for him to buy on the stock market in the current 0% interest rate environment.

[mistymoney]

thanks for the clarification!

[chevy1956]

I have some Bonds but not a lot. I sort of agree but I think Bonds can smooth the ride. They have their role.

[FLAFI]

Buffet's remarks are from 2013 when "stocks were reasonably priced."  Since 2013, Buffet has increased his cash position substantially. It was 147 billion in June. https://www.fool.com/investing/2020/10/07/why-isnt-buffett-putting-more-of-his-cash-to-work/ Depending on the source, I've read cash makes up between 25% to 39% of Berkshire Hathaway's portfolio     

Buffet is isn't deploying cash because equity values are too rich and the size of Berkshire Hathaway makes finding acquisition difficult. In times of high equity valuations, having a margin of safety and dry power when the market enters a bear market is a good idea. Cash is extremely useful in a time of panic. How much cash is too much? In 2013, 39% was way too much? In 2021, it is hard to say.       

I own bonds, but have not added any during the pandemic. I like cash better than bonds at this juncture because bonds valuation are too high with too little yield. Once interest rates go up again, bond funds will drop rapidly.

[helloyou]

Buffet's remarks are from 2013 when "stocks were reasonably priced."  Since 2013, Buffet has increased his cash position substantially. It was 147 billion in June. https://www.fool.com/investing/2020/10/07/why-isnt-buffett-putting-more-of-his-cash-to-work/ Depending on the source, I've read cash makes up between 25% to 39% of Berkshire Hathaway's portfolio     

Buffet is isn't deploying cash because equity values are too rich and the size of Berkshire Hathaway makes finding acquisition difficult. In times of high equity valuations, having a margin of safety and dry power when the market enters a bear market is a good idea. Cash is extremely useful in a time of panic. How much cash is too much? In 2013, 39% was way too much? In 2021, it is hard to say.       

I own bonds, but have not added any during the pandemic. I like cash better than bonds at this juncture because bonds valuation are too high with too little yield. Once interest rates go up again, bond funds will drop rapidly.

Indeed, $147B out of $530B market cap is 28% cash position. However he said himself that because it is mainly an insurance company, it will always have a large amount of cash, at least $50B.

In his last yearly meeting, he said that although his cash position looks high, it's not as big as it seems due to the requirement of his company to always have liquidity available to pay for claims. His strategy is to snap good stock at a distressed price, this is not what most people do.

He recommended non-professional investor to just dollar cost average and buy indexes at high and at low.

You can also notice he doesn't own any bonds other than short term treasuries, which are just the equivalent of cash to be deployed when he can.

[vand]

You can't seriously agree with Dalio that Bonds are just a promise to receive future units of a debasing currency... but then go on to say that YOU PREFER CASH... ie non-earning units of the same debasing currency...

[helloyou]

You can't seriously agree with Dalio that Bonds are just a promise to receive future units of a debasing currency... but then go on to say that YOU PREFER CASH... ie non-earning units of the same debasing currency...

Actually Dalio said that Bond IS cash. Just that you will receice it in the future.

He also said "Cash is trash"

Warren Buffett agrees with that. And he hopes to get rid of it as much as he can.

That doesn't prevent him to still have an enormous pile of cash cos he can't find good buy...


It's the same for me. I have very little cash in my portfolio. Just enough to live!

[celerystalks]

Sure. Like any other asset, your concentration in bonds should depend on your goals, risk tolerance, and timeframe. I don't have any bonds but probably will later in life.

What do you mean by risk tolerance?
What is your definition of risk?

[mistymoney]

You can't seriously agree with Dalio that Bonds are just a promise to receive future units of a debasing currency... but then go on to say that YOU PREFER CASH... ie non-earning units of the same debasing currency...

Actually Dalio said that Bond IS cash. Just that you will receice it in the future.

He also said "Cash is trash"

Warren Buffett agrees with that. And he hopes to get rid of it as much as he can.

That doesn't prevent him to still have an enormous pile of cash cos he can't find good buy...


It's the same for me. I have very little cash in my portfolio. Just enough to live!

Can you define what this enough is? In terms of months/years of expenses?

[Retire-Canada]

When I got close to FIRE I added 4 years in full spending in bonds ETFs and 1 year in cash. With an easy PT job and/or cutting back on luxuries I could stretch that amount of bonds/cash out to 7 or even 10 years. I'm not expecting to earn much from that part of my allocation. If it keeps up with inflation that would be fine. I won't be adding more bonds or cash as my portfolio grows which is why I don't shoot for an 80/20 portfolio. The bonds/cash are there for SORR mitigation.

[ChpBstrd]

Let's see. If I want to earn a 1% return on my cash in 2021, I can either take 10 years duration worth of interest rate risk* by buying treasuries, or I can sell the SPY Dec  17, 2021 put at the 180 strike for $1.90/share and thereby agree to buy the S&P 500 only if it falls over 51% in the next twelve months. This outcome has never happened in the history of the S&P500, not even in 1931.

What would the cash/bonds be for if not to buy stocks at levels last seen in 2013? Seems more reasonable to commit to that remote possibility than to boldly bet interest rate expectations stay low. Going from, say 60/40 stocks/cash to 100% equities after such a move would probably eliminate one's SORR.

*an 8.2% loss if there is a 1% increase in interest rates 12 mos. from now. For the cash collateral of the put position to lose as much as a 1% increase in interest rates would cause the bond position, stocks would have to fall 51% + 8.2% = 59.2%.
https://www.free-online-calculator-use.com/bond-value-calculator.html

[helloyou]

Can you define what this enough is? In terms of months/years of expenses?

It all depends on each situation. For my case, 2-3 months of expenses are enough

I happened to borrowed a bit on margin to pay some un-expected taxes/cost recently. And then when the market went back up I paid back the margin

[MustacheAndaHalf]

...
As well as Ray Dalio regarding cash and bonds:
"You'd be pretty crazy to own bonds, because what is debt? it's a promise to receive currency... and isn't it clear they're going to print a lot of currency?"

"The central bank has made the bond going to 100x multiples... you put a dollar out and you get your money back in a 100 years.
...

Setting aside my own view for a moment, that quote misrepresents the truth.  The 10 year treasury yields 0.93% right now, which is closest to what I assume is his 100x multiple.  In 10 years, you get your money back - not 100 years.

Even if he meant it takes 100 years to double at 1%, he would be incorrect since 1.01 to the 70th power equals 2... the money doubles in 70 years.  But he said "get your money back", which is different, and a false description of government bonds.

[helloyou]

Setting aside my own view for a moment, that quote misrepresents the truth.  The 10 year treasury yields 0.93% right now, which is closest to what I assume is his 100x multiple.  In 10 years, you get your money back - not 100 years.

Sorry I don't get the calculation... which bond can give you back your money in 10 years?

It would need something like 9-10% yield which I can't see anywhere unless for junk bonds..


Ps: actually I read again, you just mean that literally, a 10 year bond give you back your money in 10 years... Sorry I didn't think this way. So yes literally you are right but I think most people think about doubling your cash instead. And yeah your calculation shows it's potentially 70 years to double, but the exact number doesn't matter really... it's how high the multiple went up that is crazy.

To some extent, doubling it in 70 or 100 years is so long that it doesn't matter anymore. It's like saying you can double your money when you're dead... it doesn't matter because you won't live long enough to benefit from it.