Tags: Buffett | stocks | bonds | insurer

Buffett: Long-Term Government Bond Is the ‘Dumbest Investment’

Monday, 04 Mar 2013 01:23 PM

By Glenn J. Kalinoski

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While stocks are undervalued relative to other assets, long-term government bonds are the “dumbest investment,” according to billionaire investor Warren Buffett.

“[Stocks are] not as cheap as they were four years ago, but you get more for your money, and that’s why we like buying businesses and like buying stocks,” Buffett told CNBC.

“The dumbest investment you know, in my view, is a long-term government bond,” he added.

Editor's Note: The Final Turning Predicted for America. See Proof.

Buffett released Berkshire Hathaway’s annual letter to shareholders last week and in it Buffett said insurers could be facing problems because of the current near-zero interest-rate environment.

“Insurers either make an underwriting profit, or they make money from the investments they hold, which is partly their own capital,” Buffett explained.

“Generally speaking insurance companies don’t own long-term bonds. They get them rolled over fairly fast. When you roll over bonds, whether you’re a life insurer or property casualty insurer, you get a whole lot lower rate than a few years ago. So in effect, the profitability will go down because of that.”

If he could keep one company that Berkshire owns — either a wholly owned subsidiary or one that Berkshire owns a common equity in — Buffett said he would keep Geico.

Geico recorded an underwriting profit of $680 million in 2012, which would have been $410 million higher if not for a change in accounting rules at the start of 2012, Buffett said in his letter to shareholders.

Looking ahead, Buffett expressed no desire to own an airline.

“I have this number I call, if I wake up at midnight with the urge to buy an airline, I call up this ‘Airline Anonymous’ and then they talk me down,” he said.

“The airline business has been a terrible business over time. If they ever got down to where there was one airline, it would be a very good business. It’s got all the ingredients of a bad business.”

While many believe retail investors can’t “get a fair shake” as a result of high-frequency trading, Buffett doesn’t see it that way.

“[High-frequency trading] doesn’t mean a thing. If you own a McDonald’s stand, would you be worried someone would come along for five seconds and say the stand is going down 50 percent? No business was affected by that,” he explained.

“Every business we own, it didn’t make any difference. If you own things on margin, then you’ve got a problem. They can have a flash crash every day, and I’ll just put in orders to buy and we’ll see what happens.

“We live in the best country in the world, and we will solve our problems,” he noted. “And the people that own equities, purchased over time, not just when they get all excited about it, in a low-cost manner are going to do fine.”

Bill Gross, co-chief investment officer at fund giant Pimco, doesn’t expect interest rates to soar any time soon.

“I don’t see a lot of risk in bonds,” Gross told The New York Times. “The Federal Reserve is buying, and there’s no real risk until the Fed declares the war is over.” The central bank is purchasing $85 billion of Treasurys and mortgage-backed securities a month.

The Fed plans to keep interest rates unchanged until unemployment hits 6.5 percent. “By any reasonable standard, that’s going to be a long time coming — certainly not in 2013, and probably not for at least two to three more years,” Gross noted.

Editor's Note: The Final Turning Predicted for America. See Proof.

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