Thursday, 16 February 2012

Buffett: The case for shares. "It will be by far the safest."

Unsurprisingly, Buffett makes the case for investing in shares – the productive capacity of democratic capitalism. He also gives a sense of the best businesses to own. Buffett prefers '‘first-class'’ companies that can keep up with inflation and that also require only minimal new capital to produce their returns. Buffett cites Coca-Cola (NYSE:KO) as one such example.

He says “I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three (gold, cash & bonds and shares) we've examined. More important, it will be by far the safest.”

That’s a critical point – equities are often characterised as risky, volatile and complex (and some companies’ shares can be all three), but when compared to the risk taken by buying assets that don’t sustain your purchasing power, Buffett argues that the safest way to secure your financial future is to swap some shorter term volatility for longer term ‘'purchasing power'’ protection.

Comparing the returns from investing in the three asset classes discussed since 1965.
  • $US100 invested in US government bonds would have compounded to be worth $US1336 by the end of 2011. 
  • Gold would have far outpaced cash, turning into $US4455. 
  • But equities would have done over one-third better, compounding its way to $US6072.

Read more:

The Oracle of Omaha restates the greater fool (note the lower case ‘'f'’!) theory: “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”.

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