Weekend reading: Warren Buffett warns on bonds and gold

Some great reads from around the Web.

I don’t have to even pause to think what’s going to be my post of the week today – not when star pitcher Warren B. of the Omaha Value Raiders is knocking them out of the park.

In an excerpt from his upcoming shareholders’ letter in Fortune magazine, Buffett pours scorn on today’s mania for cash, and for US, German and UK government bonds with their likely desultory real yields:

Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

But before you pack your portable stove to join the gold bugs in the hills:

Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct.

Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth — for a while.

So what does hard-to-satisfy Buffett like? Real assets such as shares and productive farmland, of course:

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons).

[In contrast a] 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Pure passive investors will still want to hold and rebalance their chosen portfolio allocations, of course, and not dump all their bonds and any gold they have elected to carry. The idea here is to be smart by acting ‘dumb’…

…rather than being dumb like me by trying to be smart and running down your bond portfolio, only to see gilt yields drop in 2011 to almost unbelievably low levels that we’ve not seen since the 1960s.

I still think gilts are over-priced, however, and that Buffett will prove correct in the medium to long-term. He usually is.

If you were to write a novel about a super-rich investor, you’d surely have him doing all kinds of clandestine activities. Nobody could understand his trades, or how he made it look so simple.

Buffett – who is the world’s richest self-made investor – spends half his time telling anyone who will listen exactly how he does it.

Yet far from turning more Buffett0-esque in their approach, hedge funds and the like are investing in ever more cutting-edge technology and whiz kids to execute positions that they hold for a few seconds at a time.

Remarkable!

From the money blogs

• Markets race out of the 2012 gate – Investing Caffeine
• What’s your competitive advantage? – The Psy-fi blog
• The marginal utility of money – Mr Money Mustache (by Brave New Life)
• Basic financial frameworks – Get Rich Slowly
• ETFs are not as low-cost as index funds – The Munro blog
• Own your investments, rent your fun – Five Cent Nickel
• 18 fond financial facts about Valentine’s Day – Len Penzo
• 75 ideas for a side income – Dough Roller
• Overseas gold ETFs for geographic diversification? – Crawling Road
• How to hedge your portfolio against inflation – Amateur Asset Allocator
• Chasing yield tempting, but hazards are real – Vanguard blog

Book of the week: The Magic of Thinking Big is very American in its go-getting, varmit-shooting ways, but it has the nod from one of our finest trans-Atlantic cousins, Mr Money Mustache. Good enough for me!

Mainstream money and investing

• Penny stock scam: You’re better off igniting a pile of money – Fool.com
• Government bonds: No longer so simple – The Economist
• $1 billion manager: Stocks will fall as US population ages… – Gazette.com
• …Allan Roth disagrees, points out demographic-driven ETF failure – CBS
• Larry Swedroe: The reasoning behind the market’s rise – CBS
• Managers turn more bullish on equities [Uh oh!] – FT
• Offshore ‘gifts’ come under HMRC scrutiny – FT
• Fears of backdoor commission after RDR – FT
• Test of nerve for holders of defensive stocks – Merryn / FT
• Danny Alexander wants to cut higher-rate pension tax relief – Telegraph
• Don’t expect to turn £1 into £1,000 by investing – Telegraph
• Mortgage approvals highest for two years – Telegraph
• House prices added £68,500 to average wealth in 10 years – Telegraph
• Lloyds TSB launching Junior ISA paying 3% – MoneySavingExpert
• When shared ownership goes sour – The Guardian
• How Wall Street got its name – CNBC

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