Warren Buffett: Stocks Don't Always Beat Bonds

Warren Buffett: Stocks Don't Always Beat Bonds

Stocks aren't a lock to beat bonds even over a period as long as 20 years, Warren Buffett points out in Saturday's Wall Street Journal.

Buffett made the comments in an interview with Jason Zweig, a talented financial writer who pens "The Intelligent Investor" column for the WSJ each Saturday. He's been involved in revising Benjamin Graham's classic investing text "The Intelligent Investor" and also has a fascinating book on the emotions of investing called "Your Money and Your Brain."


Zweig's most recent column tries to dispel readers of the notion that stocks are a sure thing to beat bonds even over fairly long periods. He points out that bonds beat stocks in the 20-year period that ended June 30. 
Zweig spoke to Buffett this past week for the column. Buffett, who has been putting more money to work in the bond market than the stock market of late, points out that the key determinant for whether bonds or stocks provide better long-term returns is the price at which the investment is purchased.


"People say that stocks have to be better than bonds, but I've pointed out just the opposite: That all depends on the starting price," the Berkshire Hathaway CEO told Zweig.


Buffett does say that investors who hold the S&P 500 for long periods have exceedingly good odds to show at least some gains (which likely provides some of the rationale behind Buffett's decision to sell close to $5 billion worth of long-term put options on the S&P 500 and other major indices). Buffett tells Zweig that the odds of losing money on the S&P 500 over 25 years are roughly one in 100. That of course does not take inflation into consideration. 
Zweig tries to make clear in the column that the risk of owning stocks doesn't simply go away if your holding period is long enough. People who buy in at inopportune times may have to wait decades to recoup their money.


As an example, Zweig points out that someone who invested $1 million in U.S. stocks on Sept. 30, 2007, would have had just half that at the beginning of March 2009. People forced to retire at that time could find themselves in real trouble.


"In short, you can't count on time alone to bail you out on your U.S. stocks," Zweig writes. "That is what bonds and foreign stocks and cash and real estate are for."