Why Stocks Beat Gold and Bonds by Warren Buffet

In an article published in Fortune Asia Pacific Edition, February 27, 2012, Number 3, the Oracle of Omaha explains why equities almost always beat the alternatives over time and I would like to share many useful insights summarised below:

1) ......... investing is forgoing consumption now in order to have the ability to consume more at a later date. (This definition by Mr. Buffet is very important - some sacrifice now is always necessary for a better future. Investing is about delaying some immediate pleasure so that we can enjoy more in the future).

2) Investment that are denominated in a given currency such as money-market funds, bonds, and other instruments have destroyed the purchasing power of investors in many countries principally due to INFLATION. With the current uncontrolled printing of money in US and Europe, we will likely see further loss of purchasing power in paper money.

3) The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else - who also knows that the assets will be forever unproductive - will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce - it will remain lifeless forever - but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money. (After reading the above, I am not sure what crosses your mind but I sure feel investing in gold is just like a big pyramid scheme. You may make money if you are at the top of the pyramid and get out before the music stops!).

4) Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. At $1,750 per ounce - gold's price as I write this - its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all US cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense felling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

5) My own preference - and you knew this was coming - is our third category: investment in productive assets, whether businesses, farms or real estate. (The key word is productive assets).

Happy investing! And by the way, I am ok with gambling (or some people call it speculating) as long as we don't try to fool ourselves by calling it investing.