America's most famous investor, Warren Buffett, has told investors to stay away from traditional safe havens', such as gold and government bonds, warning that they are more risky than stocks.
The 81-year-old sage of Omaha' thinks that most money managers don't know how to judge risk properly, and look at the wrong numbers. "It all boils down to how you define investing", Buffett tells US magazine Fortune.
For Buffett, investing is all about purchasing power "forgoing consumption now in order to have the ability to consume more at a later date". Therefore, he measures risk as the reasoned probability of an investment "causing its owner a loss of purchasing power over his contemplated holding period".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Buffett reckons Wall Street analysts focus too much on volatility, which is irrelevant. "Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period."
Fixed income investments, such as bonds or bank accounts, may appear safe because they are not volatile. But "in truth they are among the most dangerous of assets". Indeed, notes Buffett, "over the past century, these instruments have destroyed the purchasing power of investors in many countries". The combination of inflation and taxes mean that long-term holders of government bonds lose the real value of their wealth.
As for gold, Buffett places it firmly in the category of assets "that will never produce anything, but that are purchased in the buyer's hope that someone else who also knows that the assets will be forever unproductive will pay more for them in the future."
Drawing comparisons with tulips, housing and internet stocks, Buffett notes that "bubbles blown large enough eventually do pop". (MoneyWeek regular Tim Price vehemently disagrees on this point you can read Tim's response to Buffett's feature in the next issue of MoneyWeek magazine, out on Friday.)
Regular Buffett watchers will be unsurprised to hear that he believes value investing' is the safest, most profitable investment option. He likes to identify productive assets, such as businesses, farms or real estate, that "have the ability in inflationary times to deliver output that will retain its purchasing-power value". Favourites include Coca-Colaand IBM.
