Time for a little bit of Monday inspiration from none other than Warren Buffett.
The Oracle of Ohama, who is working on his annual letter to shareholders, has penned an article for US magazine Fortune where he sets out why the only type of asset he wants to invest in is the one that you are building – a business.
The article is basically a restatement of Buffett’s investment philosophy, but it is making headlines around the world for what many commentators see as an attack on the asset classes of bonds and gold.
Buffett is particularly scathing of bonds, declaring that “right now bonds should come with a warning label” because interest rates are so low in the US that returns after tax – a key Buffett investment criteria – have been abysmal.
Indeed, Buffett slates all currency-based investments such as “money-market funds, bonds, mortgages, bank deposits, and other instruments”, saying that his investment vehicle Berkshire Hathaway will basically only invest in bonds as it is required to do so under liquidity regulations.
“Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: ‘Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.'”
That all makes perfect sense, given US interest rates are currently historically low and its currency has weakened badly over the last few years.
More surprising is Buffett’s attack on gold, which in the last few years has become a safe-haven investment for millions of investors around the globe, including Wall Street titans such as John Paulson.
The theory of these gold bugs is simple. In a world where governments, currencies, markets and financial systems appear fragile, gold stands out as a rock. As Warren Buffett points out in his article, the huge increase in the price – it has almost trebled in the last five years – adds weight to the safe-haven argument.
But Buffett sees two problems with the precious metal – it’s not good for much (outside of jewellery) and it’s not “procreative”. That is, an ounce of gold is still an ounce of gold in 100 years time.
These two problems mean that increases in gold supply can’t be mopped up by demand. Buffett argues that the number of gold bugs increases, the price bandwagon can continue for awhile – but not forever.
“But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: ‘What the wise man does in the beginning, the fool does in the end.'”
So what does Buffett want to invest in? The answer is simple: “Productive assets, whether businesses, farms or real estate.”
“Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens,” Buffett writes.
Now, Berkshire Hathaway doesn’t just want to invest in just any businesses, and contained in Buffett’s investment criteria is a nice little message for entrepreneurs about how to build a business for the long-term.
“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, IBM, and our own See’s Candy meet that double-barrelled test. Certain other companies – think of our regulated utilities, for example – fail because inflation places heavy capital requirements on them. To earn more, their owners must invest more.”
“Even so, these investments will remain superior to non-productive or currency-based assets.”
So business owners, take a little tip from the world’s most respected investor. It’s the hard work of entrepreneurs that delivers investment returns and grows the prosperity of economies.
Let’s hope investors – and the banks – take Buffett’s advice too.