Warren Buffett: Why stocks beat gold and bonds
Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.
From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.
Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.
- Warren Buffett's 2011 Shareholder Letter
Link to: Warren Buffett's 2011 Letter to Shareholders **********Excerpt: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...
- Tradewinds - David Iben’s July 2011 Commentary: Hard Times And Nursery Rhymes
Link to: Hard Times and Nursery Rhymes - by David Iben ………...Excerpt: Returning to Fortune’s Formula, many pages were devoted to the pros and cons of geometric averaging (vs. arithmetic) and to the Kelly Criterion. While we all understand the...
- Tradewinds - David Iben’s March 2010 Commentary: Avatar
Thanks to Mike G. for passing this along. The current investment environment is complex and challenging to say the least. Capitalism as we've known it is dead. The financial system is broken and the currencies are being debased. Should investors prefer...
- Do Stocks Provide A Sufficient Hedge Against Inflation?
A great article from Ben at The Inoculated Investor blog. Large Excerpt: So, with all of the issues with gold, I guess that leaves ownership stakes in businesses as the best inflation hedge, right? Bruce Greenwald thinks so: “The assets that are most...
- Nominal Vs Real Return
Nominal returns are the total annual return that you received on the investment. Real return accounts for the effects of inflation. Real Return = Nominal Return - Inflation Rate For the purposes of this example I've assumed that $1 is invested at...