The Rational Investor #052: Why We Should Prefer Equities
Happy Saturday to you,
Welcome to the 52nd edition of The Rational Investor Newsletter!
A QUICK UPDATE FROM LAST WEEK’S ANNOUNCEMENT: With regard to last week’s announcement that I am capping my membership, we now have just 30 spots (out of 500) remaining. If you’d like to join, now is the time.
Now, back to our regularly scheduled programming!
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This week’s quote comes from Warren Buffett’s 2011 Shareholder Letter. It comes from the section titled “The Basic Choices for Investors and the One We Strongly Prefer.” In this section, Buffett closes by laying out his logical argument for his preference for owning the great companies of the world.
So, without further ado, here we go…
Here’s Warren Buffett on Why He Prefers Equities [Emphasis is Mine]:
“My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.
Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.
Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well) [Note: This was written in 2011, it’s now 42,000]. Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.”
To state the obvious, very few Main Street investors would refer to equities as “by far the safest.” Earlier in the letter, he referred to bonds as being “the most dangerous of assets.”
That’s interesting because we, the general public, have been conditioned to believe and to refer to equities as “risky” and bonds as “safe.” Buffett makes it quite clear that he believes the exact opposite. Unfortunately, Main Street investors incur an incredibly high cost—in the form of reduced returns and less money later in life—for this incorrect belief.
With no further research than that one little fact, I’d like to think that more investors will begin to see the point Buffett makes in these descriptions and then invest accordingly.
That’s all for this week. Thanks for reading. I’ll be back next week with more timeless wisdom from great investors.
