By
Learn Bonds
:
Is Warren Buffett, the chairman of Berkshire Hathaway (BRK.A), a
smart bond investor? Buffet recently sold off
much of his exposure to the municipal bond
market
. If he has a good track record for predicting broad bond market
moves, you might be tempted to follow his example and sell
municipal bonds. However, our research shows that investors who
sell municipal bonds based on Buffett's move would be making a
mistake. Here's why:
Buffet first expressed his negativity towards municipal bonds in
a 2008 letter to shareholders. His annual
letters to shareholders
are legendary for their directness and market insight. We looked
through these letters to find out how well Warren Buffett's broad
bond market predictions have stood the test of time.
Our conclusion:
While Buffett has been great at picking individual bond issues, he
has been consistently wrong about broad market bond trends for over
30 years.
(click to enlarge)
1979 Letter:
long bonds may turn out to be obsolete instruments and
insurers who have bought those maturities of 2010 or 2020 could
have major and continuing problems on their hands.
As you can see from the below chart, Buffett made this call at
the start of the largest bull market run in bonds in history.
30 Year Treasury Bond Chart 1979 - 2012
(click to enlarge)
As he watched the bond market head higher and higher after his
1979 comment, many years pass until the next time he mentions the
bond market as a whole. At that point, the run higher had not
changed his mind on bonds however, as he doubles down on his bond
market bear talk in both his 1987 and 1988 letters:
1987 Letter:
We continue to have an aversion to long-term bonds.
1988 Letter:
Our WPPSS experience, though pleasant, does nothing to
alter our negative opinion about long-term bonds.
The next time Buffet makes a broad statement about bonds it is
not about the bond market as a whole, but specifically about junk
bonds, where he says in his 2003 letter:
2003 Letter:
…
this sector
[Junk Bonds]
now looks decidedly unattractive to us. Yesterday's
weeds are today being priced as flowers.
As you can see from the below chart, junk bonds raced higher for
the next few years, and after a brief dip during the financial
crisis, continued their stellar performance.
Junk Bond Market 2003 to 2012
(click to enlarge)
The next time Buffett spoke about the bond market broadly, it
was US Treasuries, where he said in his 2008 letter:
2008 Letter:
When the financial history of this decade is written, it
will surely speak of the Internet bubble of the late 1990s and
the housing bubble of the early 2000s. But the U.S. Treasury
bond bubble of late 2008 may be regarded as almost equally
extraordinary.
As you can see from the chart below it's now over 4 years later
and we have been headed higher still ever since.
30 Year Treasury Bond Chart, 2008 to Present
(click to enlarge)
And then finally, Buffett's latest comment on the bond market as
a whole came in his most recent letter where he said:
2011 Letter:
Right now bonds should come with a warning label. Today, a
wry comment that Wall Streeter Shelby Cullom Davis made long
ago seems apt: "Bonds promoted as offering risk-free returns
are now priced to deliver return-free risk."
It's too early to tell whether Buffett will be proven right on
his latest comment. If he is right, however, then as we discuss in
"
5 reasons the bond market bears are wrong
," it will only because he has been wrong for so long. With this in
mind, investors may want to think twice before writing off the
municipal bond market based on Buffett's recent move.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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