Canadian newsletter editor Shawn Allen wrote quoting Warren Buffett about comparing expected returns from bonds and stocks. In his 1984 letter, Buffett states:
“We believe that many staggering errors by investors could have been avoided if they had viewed bond investment with a businessman’s perspective. For example, in 1946, 20-year AAA tax-exempt bonds traded at slightly below a 1% yield. In effect, the buyer of those bonds at that time bought a ‘business’ that earned about 1% on book value that moreover, could never earn a dime more than 1% on book), and paid 100 cents on the dollar for that abominable business.
“If an investor had been business-minded enough to think in those terms – and that was the precise reality of the bargain struck – he would have laughed at the proposition and walked away. For, at the same time, businesses with excellent future prospects could have been bought at, or close to, book value while earning 10%, 12%, or 15% after tax on book. Probably no business in America changed hands in 1946 at book value that the buyer believed lacked the ability to earn more than 1% on book. But investors with bond-buying habits eagerly made economic commitments throughout the year on just that basis. Similar, although less extreme, conditions prevailed for the next two decades as bond investors happily signed up for twenty or thirty years on terms outrageously inadequate by business standards.
“Today, once again investors are happily buying long-term bonds on terms that are outrageously inadequate by business standards. It’s an abomination.”
Shawn edits www.investorsfriend.com
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