NEW YORK (
, chairman of
(BRK.B - Get Report)
and unofficial CEO of America, is giving investors one more chance to stop being led into speculative bubbles and reckless investments and build a portfolio the smart way: meaning to invest like him.
excerpt from his upcoming annual letter
to Berkshire shareholders published on
Web site Thursday, Buffett put it plainly to investors: Ditch gold, beware of bonds and hold equities for the long term. Anything else, and an investor is confusing fear-based speculation and the herd mentality for investing, Buffett says.
Writing on bonds and commodities as two of the three investing pillars, Buffett remarks: "Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard 'cash is king' in late 2008, just when cash should have been deployed rather than held. Similarly, we heard 'cash is trash' in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort."
It's a philosophy that Buffett has long espoused: Equities are the only way to go. At last year's Berkshire Hathaway annual meeting, Buffett joked about the uselessness of a bar of gold.
To break down the don of American capitalism's antipathy for fixed-income and commodities and his ceaseless love of stocks and businesses, here are eight principles Buffett laid out in his latest ode to equities:
1. The riskiness of an investment is not measured by Wall Street's preferred lingo of beta, but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period.
In other words, the "safe" assets of fixed income and commodities aren't so safe, after all. In truth, Buffett argues, currency-based assets are "the most dangerous."
2. What makes currency-based investments like bonds and money market funds so unsafe is the inevitable lack of control investors have compared to the government.
"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. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time, such policies spin out of control."