Buffett on Stocks, Bonds, Commodities and Gold

JOE: Here’s, you know, listening to you talk, though, Warren, when you say with your comments about bonds, that makes me think of financial assets in general, which includes stocks. And I think about the printing presses not only in this country, but around the world. You’ve seen the commercial, cha-chung, cha-chung, cha-chung, with the central banks. And there are periods where financial assets are great from the like early ’80s to 2000. And I just wonder if there’s then periods where hard assets are great. And you see Paulson and gold and some of these other guys and gold or commodities. Are you just not comfortable with commodities? Are there times where you should be downplaying maybe stocks or businesses and going totally full-bore into commodities but you’re just not comfortable doing that?

BUFFETT: No, the alternative with me, Joe, the alternative— I don’t like— I don’t like fixed dollar investments at all. I don’t like short-term bonds, I don’t like long-term bonds. We own a lot of short-term bonds, but that is not because we like them, that’s just a parking place.

But the alternative in my view, I mean, certainly commodities can be an alternative, but the alternative is income-producing assets of one sort or another that are not fixed dollar type investments. And so I— I’ve said consistently for the last few years I would vastly prefer to own common stocks than fixed dollar investments over a five or 10-year period. I don’t know any about the next five hours or five days. And that might very well extend to rental real estate, it might extend to farms. I mean, an investment you’re looking for something where you put out money now and that asset that you buy gives you back more money over time. Now, the problem with commodities is that you’re betting on what somebody else will pay for them in six months. The commodity itself isn’t going to do anything for you.

So there’s two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there’s assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn’t produce anything. And those are two different games. I regard the second game as speculation. Now there’s nothing immoral or illegal or fattening about speculation, but it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something you expect to produce income for you over time. I bought a farm 30 years ago, not far from here. I’ve never had a quote on it since. What I do is I look at what it produces every year, and it produces a very satisfactory amount relative to what I paid for it.

If they closed the stock market for 10 years and we owned Coca-Cola and Wells Fargo and some other businesses, it wouldn’t bother me because I’m looking at what the business produces. If I buy a McDonald’s stand, I don’t get a quote on it every day. I look at how my business is every day. So those are the kind of assets I like to own, something that actually is going to deliver, and hopefully deliver to meet my expectations over time. A piece of art, you know, may go from $1,000 to $50 million, but it’s dependent on what the next guy wants to pay me. The art itself— the painting itself is not going to dispense cash. So I have to find somebody that’s going to like it more. And with most— with an asset like gold, for example, you know, basically gold is a way of going along on fear, and it’s been a pretty good way of going along on fear from time to time. But you really have to hope people become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn’t produce anything.

BECKY: Well, speaking of gold, though, we’re looking at gold prices and they were at another record high. They’re up another $3 today, $1,434 an ounce. And there have been some big fat hedge fund managers, like a Paulson or a David Einhorn, who have really buckled down on these bids. Why would you steer clear? And do you think what they’re doing is the wrong thing?

BUFFETT: Well, I just don’t know. I don’t know whether cotton’s going to go up.

BECKY: OK.

BUFFETT: I mean, we use a lot of cotton. I’ve watched it go from 80 cents to $1.90. You know, we use a lot of copper and I’ve watched it go from $2 to $4-plus, so I mean there’s all kinds of things in this world that are going to go up and down in price. You know, maybe hamburgers will tomorrow. And— but I— I’m— I don’t know how to judge that. I do know how to judge to some extent the earning power of some businesses. And the real test of whether you would like it as an investment is whether you would be happy if it never got quoted again, and just in terms of what the asset did for you. But that doesn’t— I will say this about gold, if you took all of the gold in the world it would roughly make a cube 67 feet on a side. So if you took all the gold in the world, we could have a cube that went down there 67 feet…

BECKY: Uh-huh.

BUFFETT: …67 feet high and that would be the whole thing. Now for that same cube of gold it would be worth at today’s market prices about $7 trillion. That’s probably about a third of the value of all the stocks in the United States. So you could have a choice of owning a third of all the stocks in the United States or you could have a choice of owning that little block of gold, which can’t do anything but kind of shine there and make you feel like Midas or Croesus or something of the sort.

Now, for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They’re valued at about $2 1/2 trillion. It’s about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,’ and it says, `I don’t do anything. I just stand here and look pretty.’ And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobiles. Just think of that. Add $1 trillion of walking around money. I, you know, maybe call me crazy but I’ll take the farmland and the ExxonMobiles.

Buffett: The ‘Zebra’ That Got Away, 2 Mar 2011

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