Systematic Relative Strength

The Oracle of Omaha in his annual letter to shareholders, excerpted here from Bloomberg wrote:

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said low interest rates and inflation should dissuade investors from buying bonds and other holdings tied to currencies.

“They are among the most dangerous of assets,” Buffett said in an adaptation of his annual letter to shareholders that appeared today on Fortune magazine’s website. “Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.”

“High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments- and indeed, rates in the early 1980s did that job nicely,”Buffett wrote. “Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.”

I added the bold. To be fair, bonds have not created a portfolio problem for anyone yet. Their recent performance has been okay. I think Buffett is taking a longer term view here, so it’s important if you are a bond holder to have an exit plan should one become necessary. The concern is that bonds have been selling like hotcakes. Retail investors are still heavy, heavy buyers of bonds, something Mr. Buffett obviously feels they may eventually have cause to regret.

For proof, here’s a chart of the Credit Suisse Global Risk Appetite Index, courtesy of Clusterstock. It doesn’t take long to look through and see all of the crises you have already survived! Given all of the disasters listed on the chart over the past 30 years, how has the market done? Up 562%. Yes, you have to grit your teeth sometimes, but long-term investing can have a big payoff.

Source: Clusterstock (click on image to enlarge to full size)