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Good day, esteemed investors. I still read Buffett's letters to investors for fun. These are truly timeless investment insights. And now I'm reading from 1978 to 1981. And the topics are inflation, gold, and bonds. Three topics that could be very, very interesting for us investors during the next decade.
If we see inflation, if we see higher or different interest rates . Therefore, let's delve into what Buffett, in his eternal wisdom, shared in his letters and what his advice is on what we should do with bonds, inflation, and even gold. Let's begin . So, Buffett on bonds. He says that the original 3% savings bond, a 5% savings account, or an 8% U.S.
Treasury bond have been transformed by inflation into financial instruments that consume, rather than enhance, purchasing power over their lifetime . So, the key with long-term bonds is very simple. Let me tell you about short-term bonds, everything Buffett has in cash, more than $100 billion, is in short-term U.S.
Treasury bonds maturing in 4 months. So, for Buffett, high liquidity is like cash, and he earns a return on that. He does not invest in long-term bonds. He did it in the 1970s. Later he explains how that was a mistake. But why not invest in bonds? Well, it's very simple. Now, if we look at this chart, the 40-year Treasury yield in red and the inflation rate, we can see that those who invested in the 40-year Treasury in 1982 did extremely well, as they secured an annual return of 15% from the US government, which simply declined.
So, if you had invested back then in 1982, you would have secured a great return and made a truly lucrative investment. However, if you had invested in previous years, from 1974, 1975 at 7% or 10%, you would not have been so happy in the long run. And this is what Buffett is really warning us about.
We don't know what the inflation rate will be. We don't know where yields will go, especially those of long-term bonds. And that's why Buffett says, "That's more of a gamble than a real investment." "And it's better to own a business than to invest in bonds." And especially now, and my point, and even Buffett's, is that especially now with the 30- year US government bond at 3%, bonds offer a very low yield, of 3%, and very large risks.
If there is an average inflation rate of 5% over the next 10 years, and you remember that inflation is man-made, the government can say, "Okay, let's raise inflation to 5%." "It will make it much easier to pay off our debt." And you've set a 3% for the very long term, while inflation could be 5, 7 or even higher, which means it will eat up your investment, your money.
Therefore, long-term bonds are extremely risky, especially now. We are not at 15%. At 15%, I might risk investing in long-term bonds. At 3%, definitely not. But short-term investors could bet on those changes if interest rates rise and fall, although no one can know what will happen with interest rates.
Buffett has serious doubts that very long-term fixed-rate dollar-denominated bonds remain an appropriate trading contract in a world where the value of the dollar seems to be declining almost certainly day by day. Dollars, as well as paper creations of other governments, may simply have too many structural weaknesses to adequately serve as a long-term trade reference unit.
So, just like now, the dollar and all currencies have always been structurally weak, so they will lose money and value in the long run, and that's why Buffett only invested in convertible bonds, which is a different game. Given the weakness of the dollar, inflation—what is inflation? Buffett understands that low inflation is possible since it is man-made, but that's gambling, not investing.
No one could have known for sure that high interest rates would not persist in 1982 and that low interest rates would continue for so long since then. How did Buffett protect himself from inflation? He bought food stocks, which is exactly the sector I 'm also investigating now. There are some videos on YouTube if you want to learn more, or articles on my website.
His position in 1981, General Foods. The company was later acquired by Philip Morris and, consequently, spun off into Kraft. So those experts who say Buffett lost money or made a mistake with Kraft will have to watch our upcoming videos when we look at how much money Buffett made with the acquisition of General Foods.
Just to finish, Buffett on gold. Analyze how a friendly but insightful commentator on Berkshire pointed out that our book value at the end of 1964 would have bought about half an ounce. of gold, and 15 years later , having reinvested all the profits along with much sweat, blood and tears, the book value produced will buy approximately the same half ounce.
However, that was only during that period from 1964 to 1980 . Since then, Berkshire's shares exploded and gold only exploded again from 2000 to 2011, but now at 1,200 or 1,300, it has only doubled in value since then. Berkshire has had to work hard since the 1980s. Berkshire's stock has risen much, much more since the 1980s.
And this is also the message that Buffett has always had about gold. Gold is not really an investment that consistently yields returns. In the last 50-60 years, it paid out twice, from the 70s until 1982. And then you had to have had the courage to sell, because afterwards, from 1982 to 2002, nothing.
20 years of zero, negative and terrible returns. Then, a boom from 2002 to 2012. And then again, from 2012 onwards, very poor returns. And we are still 40% below the peaks. Therefore, gold produces nothing. Meanwhile, Buffett continued to achieve results with businesses that performed as well as gold during that period , and would perform much better than gold in the future.
That is, dividends, profit growth, and business growth. And the more I look, those businesses, like General Foods later for Buffett, offer even better protection than gold. And this is where we, Buffett and I, agree. I own a mining company. I just sold one. If you haven't seen the video, check it out.
But I'm investing in businesses, mining businesses, value and margin of safety, not just betting on gold. So, the conclusion: don't invest in long-term bonds. It's better to invest in businesses . Don't invest in anything with long-term fixed rates. If you are a lender, ask for long-term loans. Nobody knows what will happen with inflation, since it is artificial.
Good businesses and assets offer both protection and returns. Gold is speculation. See how that fits into your wallet. Please subscribe if you haven't already . Visit my website for more resources, books, newsletters, articles, anything that can add value to your portfolio. Thank you, and see you in the next video.
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