Warren Buffett’s Track Record: Spotty on Bonds

 

Is Warren Buffett, the chairman of Berkshire Hathaway, a smart bond investor?  Buffet recently sold much of his exposure to municipal bond market. If he has a good track record for predicting broad bond market moves, you might be more tempted to follow his example and sell municipal bonds.

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Buffet first expressed his negativity towards municipal bonds in 2008 letter to shareholders. His annual letters to shareholders are legendary for their directness and market insight. Learn Bonds looked through these letter to find out how well Warren Buffett’s broad bond market predictions stood the test of time.

The conclusion: Warren Buffett has been great at picking individual bond issues BUT consistently wrong about the broader bond market for more than 30 years.

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

As he watched the bond market head higher and higher after his 79 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 87 and 88 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.

 

Learn more about investing in junk bonds

 

Junk Bond  Market 2003 to 2012

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 its now over 4 years later and we have been headed higher still ever since.

30 Year Treasury Bond Chart, 2008 to Present

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.”

Its 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.

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