My Two Cents

A Warren Buffett warning

Chris Farrell Feb 28, 2009

Warren Buffett’s annual letter to shareholders is out. His company, Berkshire Hathaway, had its worst year since the premier stock picker took it over in 1965. Of course, a lot of CEO’s would kill to have his results–even in a bad year.

As always, his letter is a remarkable document. I’d recommend reading it several times. I plan on it.

But for right now I want to highlight a segment of the letter that warns of a Treasury market “bubble.” The timing is uncertain, but I think he’s right. No market rallies forever. Investors don’t like zero percent yields. The economy will rebound, eventually.

Here’s what Warren Buffett has to say:


The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms.

When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning
close to nothing and will surely find its purchasing power eroded over time.

Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

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