In an "adaptation" of his coming shareholder letter, Berkshire Hathaway (BRK.A) chief Warren Buffett lays out why he thinks equities not only beat alternative investments in regards to total returns, but also safety. Yes, Buffett thinks equities are safer than gold or bonds.
It's an intriguing idea, one that runs counter-intuitive to what has been considered standard for the last decade. In the attached clip I discuss the case for equities over all other assets with Art Hogan, managing director at Lazard Capital Markets.
First the common alternatives to stocks are gold and bonds.
While no one disputes the drubbing gold that has given equities so far this century, Hogan says it ultimately comes down to what an investment vehicle produces organically. In the case of gold, Hogan, like Buffett, says the answer is not much.
"Gold doesn't really give you anything," he states. "It doesn't produce anything and doesn't give you income."
Noting the gold bear market ending in 2000 was "old enough to vote in every state of the union," Hogan says investors who bought gold 2,000 years ago would have the same clump of gold they do now; two millenium of no organic return.
As for bonds, Hogan thinks 2011 was a "generational year" in regards to out-sized returns.
"If I would have told you twelve months ago that the 30-year (treasury yield) would be up 25 - 30%, you would have laughed me out of the studio," he says. In fairness he's probably right. At this point Hogan says the parade has gone by, the Fed says they're done cutting, and the rest of the world has joined the U.S. When "safe" assets rise as fast as debt has in the last year they suddenly become quite risky.
Having laid out his argument against gold and bonds, Hogan provides three reasons why he agrees with Buffett's call to own stocks.
1. Stocks are the only investment providing a "clear and present value." The S&P500 is relatively cheap on valuation and has spent twelve years working off a bubble as other assets soared. Stocks give you a tangible underlying asset without the premium now present in debt or the illusory glitter of gold.
2. Central banks around the world are pushing us into stocks (read: "out on the risk spectrum"). Yes they have been doing so for years, as a result devaluing currencies and, in effect, illustrating the case against cash.
3. Contagion fears are played out and misplaced. Never mind the Greek deal du jour, Hogan agrees with most sensible people that "at some point Greece leaves the Eurozone." Where he differs with many is that he believes Greece's departure will leave the world intact. There's not going to be a "knock-on effect" says Hogan. "It's not another Lehman."
That's Hogan's case for stocks and it more or less echos what we've heard from the Oracle of Omaha. Are they right? Let us know what you think in the space below. And please answer our poll question below: Is this market resilient or complacent?
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