From the Church of Buffettology:
You can fondle the cube, but it will not respond. In the February 27, 2012 issue of Fortune, Warren Buffett published an adaptation from his upcoming Berkshire Hathaway (BRK.A) shareholder letter. Buffett explains why equities almost always beat all other alternatives (bonds, gold, etc.) over time.
First to bonds, Buffett says, "Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits and other instruments. Most of these currency-based investments are thought of as ‘safe.’ In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge. 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."
Buffett tells investors to also avoid gold, "Gold has two significant shortcomings, being neither of much use nor procreative." Buffett surmises if you took all of the world's gold stock (~170,000 metric tonnes) and melded into a block, it would form a cube of about 68 feet per side. At $1,750/oz, the cube's value would be about $9.6 trillion. For $9.6 trillion, Buffett says one could buy all the farmland in the U.S. (400 million acres with output of about $200 billion annually), Exxon Mobil (XOM), the world's most profitable company (earning more than $40 billion annually), sixteen times over and have about $1 trillion left over for walking-around money.
Also, 100 years from now, Buffett says, the 400 million acres of farmland will have produced many a bountiful harvest, the 16 XOMs will probably have delivered trillions of dollars in dividends to its shareholders and will also hold assets worth many trillions more. Meantime, the 170,000 tonnes of gold will be unchanged in size and still incapable of producing anything. "You can fondle the cube, but it will not respond," says Buffett. "[I]nvestment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment...Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest."
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