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Warren Buffett’s Advice on Stocks vs. Bonds
In October 2010, Warren Buffett thought that stocks were far more attractive than bonds, a prediction that proved to be accurate.
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“It’s quite clear that stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities. But people do because they, the lack of confidence. But that’s what makes for the attractive prices. If they had their confidence back, they wouldn’t be selling at these prices. And believe me, it will come back over time.”
— Warren Buffett, October 5, 2010
From our perspective in mid-2023, Warren Buffett’s advice in late 2010 seems obvious, but it was not self-evident at the time. The United States had recently emerged from a financial crisis and it took years for investors to regain confidence. In retrospect, most of the fluctuations that seemed meaningful to us on a day-to-day basis have receded into mere noise when we zoom out and look at markets over a period of many years.
With the benefit of hindsight, Mr. Buffett’s observations nearly thirteen years ago were exactly on target. From October 2010 to May 2023, the S&P 500 posted an annualized return of 10.7%. Those who reinvested dividends would have achieved a 12.7% annualized return over that timeframe. Berkshire Hathaway Class A shares have compounded at an annualized rate of 11.8% since October 4, 2010.
Stocks have done very well indeed, just as Mr. Buffett predicted. How does this compare to the experience of bond investors over the same timeframe?
When I listen to Mr. Buffett comment on bonds, I usually think of treasury securities because Berkshire Hathaway tends to concentrate its fixed maturity investments in treasuries rather than accept credit risk. The occasional drama over the debt ceiling notwithstanding, treasury securities are considered very safe when it comes to credit risk. This lack of credit risk usually comes at the cost of relatively low returns.
On October 5, 2010, the following yields were available on treasury securities:
Although no one knew it at the time, treasuries were at the beginning of a very long period of extremely low returns. In 2010, the Federal Reserve did not yet have an explicit inflation target, but Chairman Ben Bernanke would soon announce a 2% target. Investing at the short end of the yield curve was a near guarantee of loss of purchasing power of time. A yield in excess of inflation expectations at the time could be obtained in treasuries, but only by purchasing a maturity of ten years or more which involves taking considerable duration risk.
In 2010, fixed income investors might have waited on the sidelines in short term treasury bills expecting that long term treasuries would eventually provide more attractive yields as the economy recovered. While the ten year treasury did offer better yields occasionally, the story of the past thirteen years has been one of consistently low long term yields, as we can see from the chart of the ten year treasury note:
According to the inflation calculator provided by the Bureau of Labor Statistics, the consumer price index compounded at approximately 2.7% from October 2010 to April 2023. Investors in the S&P 500 or Berkshire Hathaway have compounded their wealth far in excess of inflation while an investor in longer term treasury securities would have been lucky to achieve any real return after inflation and taxes.
What if a skittish investor worried about the risk of investing in stocks but found the yields offered on ordinary treasuries unappealing because of the risk of inflation?
Since 1997, the United States Treasury has offered Treasury Inflation Protected Securities (TIPS) which are meant to provide investors with a real return adjusted for inflation. Just as we have a yield curve for regular treasury securities, we also have a yield curve for TIPS. This is what TIPS yields looked like on October 5, 2010:
Unlike regular treasury securities, TIPS are only offered as longer term securities at auction, although one can purchase TIPS on the secondary market for shorter maturities. For purposes of this discussion, I have displayed TIPS yields for five to thirty year maturities in the chart above. Note that the yields are expressed in real terms. In addition to the real yield, investors receive an adjustment for inflation.
At the time, the yield curve was upward sloping for TIPS, with the five year offering a real yield of negative 0.19% and the thirty year security offering a real yield of 1.54%.
It is interesting to note the difference between the yield on the regular ten year treasury of 2.5% and the yield on the ten year TIPS of 0.65% which implies that the market expected the inflation rate to be approximately 1.85% over the ten year period. This means that the choice of investing in the regular ten year treasury or the ten year TIPS would depend on the investor’s expectation of inflation. The investor who expected inflation higher than 1.85% would opt for the TIPS over the regular treasury.
Just as the interest rate for regular treasury securities fluctuates over time, TIPS real yields also fluctuate. The following chart shows how the real yield on the ten year TIPS has varied over the past thirteen years:
We should note that the real yield on longer term TIPS can become negative, as we can see from the exhibit above. This happened early in the thirteen year period and, in a more extreme way, during the period following the pandemic. As of mid-2023, real yields on TIPS are back in positive territory again.
The other option for risk averse small investors in October 2010 would have been to buy I Series U.S. Savings Bonds, also known as I Bonds. However, at the time, the I Bond offered a real yield of 0%, lower than the yields available on TIPS.
The bottom line is that unless an investor in October 2010 was willing to take credit risk in bonds and had a high degree of skill, it is almost certain that stocks provided far higher returns. A long-term investor who took Warren Buffett’s advice to heart would have achieved returns well in excess of inflation. In the bond world, an investor would have struggled to keep his head above water in real purchasing power terms.
This raises the question of whether it ever makes sense to invest in bonds over long periods of time, especially during periods of inflation. The answer depends on the yields offered on bonds, the likely level of inflation in the future, and the current valuation of a broad-based index of U.S. stocks.
I recently wrote an article about the role of TIPS in a fixed income portfolio, but this was in the context of a five year cash flow ladder rather than a long term investment. However, the fact is that the majority of investors will want to allocate a portion of their assets to bonds, especially those who are approaching their retirement years. A bond allocation usually provides a baseline level of perceived stability which permits many investors to view stock price fluctuations with greater equanimity, avoiding panic during the inevitable periods when stocks are declining.
For U.S. based investors who are unwilling to take credit risk, it makes sense to focus on securities backed by the United States government. Both marketable treasury securities and savings bonds have no credit risk, although all marketable securities, including regular treasuries and TIPS, have duration risk if sold prior to maturity.
Anyone investing in bonds needs to be aware of the risk of inflation, the topic of an article published yesterday. TIPS and I Bonds are both viable options that can provide limited inflation protection. In my next article, I will provide a detailed comparison of how TIPS and I Bonds work along with my opinion on how they might be used for various investment goals based on the interest rates that currently prevail.
Copyright, Disclosures, and Privacy Information
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Crypto traders shift focus to these 4 altcoins as Bitcoin price flatlines
Bitcoin’s tight range trading points to a potential range expansion and that could trigger a trending move in LINK, MKR, ARB, and THETA.
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Bitcoin’s tight range trading points to a potential range expansion and that could trigger a trending move in LINK, MKR, ARB, and THETA.
Bitcoin (BTC) has been trading in a tight range for the past three days even as the S&P 500 fell for the last four days of the week. This is a positive sign as it shows that cryptocurrency traders are not panicking and rushing to the exit.
Bitcoin’s supply seems to be gradually shifting to stronger hands. Analyst CryptoCon said citing Glassnode data that Bitcoin’s short-term holders (STHs), investors who have held their coins for 155 days or less, hold the least amount of Bitcoin supply in more than a decade.
In the short term, the uncertainty regarding Bitcoin’s next directional move may have kept traders at bay. That could be one of the reasons for the subdued price action in several large altcoins. But it is not all negative across the board. Several altcoins are showing signs of a recovery in the near term.
Could Bitcoin shake out its slumber and start a bullish move in the near term? Can that act as a catalyst for an altcoin rally? Let’s study the charts of the top-five cryptocurrencies that may lead the charge higher.
Bitcoin price analysis
The bulls have managed to sustain the price above the 20-day exponential moving average ($26,523) but they have failed to start a strong rebound. This indicates a lack of demand at higher levels.
The flattish 20-day EMA and the relative strength index (RSI) near the midpoint show a status of equilibrium between the buyers and sellers. A break below the 20-day EMA will tilt the advantage in favor of the bears. The BTC/USDT pair could then descend to the formidable support at $24,800.
Alternatively, if the price rises from the current level and climbs above the 50-day simple moving average ($26,948), it will signal that buyers are back in the driver's seat. The pair may then attempt a rally to the overhead resistance at $28,143.
BTC has been trading below the moving averages on the 4-hour chart but the bears have failed to start a downward move. This suggests that selling dries up at lower levels. The bulls will try to propel Bitcoin price above the moving averages. If they manage to do that, the pair could rally to $27,400 and subsequently to $28,143.
If bears want to seize control, they will have to sink and sustain BTC price below $26,200. That could first yank it down to $25,750 and then to the $24,800-support.
Chainlink price analysis
Chainlink (LINK) surged above the downtrend line on Sep. 22, indicating a potential trend change in the near term.
The moving averages have completed a bullish crossover and the RSI is in positive territory, indicating that the buyers have the upper hand. On any correction, the bulls are likely to buy the dips to the 20-day EMA ($6.55). A strong rebound off this level will suggest a change in sentiment from selling on rallies to buying on dips.
The bulls will then try to extend the up-move to $8 and eventually to $8.50. If bears want to prevent the up-move, they will have to sink and sustain the LINK/USDT pair below the 20-day EMA.
Both moving averages are sloping up on the 4-hour chart and the RSI is in the positive zone. The bulls have been buying the dips to the 20-EMA indicating a positive sentiment. If LINK price rebounds off the 20-EMA, $7.60 will then be the upside target to watch.
Contrary to this assumption, if Chainlink's price continues lower and skids below the 20-EMA, it will signal profit-booking by the bulls. LINK may then retest the breakout level from the downtrend line. The bears will have to sink it below $6.60 to be back in control.
Maker price analysis
Maker (MKR) turned down from the overhead resistance at $1,370 on Sep. 21, indicating that the bears are trying to defend the level.
The 20-day EMA ($1,226) is the support to watch for on the downside. If the price rebounds off this level, it will suggest that lower levels continue to attract buyers. The bulls will then make one more attempt to drive MK price above the overhead resistance. If they can pull it off, the MKR/USDT pair could accelerate toward $1,759.
Conversely, if the bears sink the price below the 20-day EMA, it will suggest that the bullish momentum has weakened. That could keep the pair range-bound between $980 and $1,370 for a few days.
The moving averages on the 4-hour chart have flattened out and the RSI is just below the midpoint, indicating a balance between supply and demand. If buyers shove the price above $1,306, MKR pric could sprint toward $1,370.
Instead, if the price turns down and breaks below $1,264, it will suggest that the selling pressure is increasing. That could clear the path for a further decline to $1,225. A slide below this support may tilt the short-term advantage in favor of the bears.
Arbitrum price analysis
Arbitrum (ARB) is in a downtrend. The bears are selling on rallies to the 20-day EMA ($0.85) but a positive sign is that the bulls have not ceded much ground. This suggests that the bulls are trying to hold on to their positions as they anticipate a move higher.
The RSI has risen above 40, indicating that the momentum is gradually turning positive. If buyers kick the price above the 20-day EMA, it will suggest the start of a sustained recovery. The ARB/USDT pair could first rally to the 50-day SMA ($0.95) and thereafter to $1.04.
The support on the downside is $0.80 and then $0.78. Sellers will have to drag ARB price below this zone to make room for a retest of the support near $0.74. A break below this level will indicate the resumption of the downtrend.
The 4-hour chart shows that the bears are selling the rallies to the downtrend line. The bears pulled the price below the moving averages but could not sink ARB pric below the immediate support at $0.81. This suggests that the bulls are trying to form a higher low.
Buyers will again try to propel the price above the downtrend line. If they succeed, Arbitrum price is likely to start a strong recovery toward the psychological level of $1. Contrarily, a break below $0.81 can tug ARB price to $0.78 and subsequently to $0.74.
Theta Network price analysis
Theta Network (THETA) soared above the 20-day EMA ($0.61) on Sep. 23, indicating that the bulls have absorbed the supply and are attempting a comeback.
The bears have pulled the price back below the 50-day SMA ($0.64) but the bulls are expected to defend the 20-day EMA. If THETA price turns up from the current level and climbs above the 50-day SMA, it will enhance the prospects of a retest of $0.70.
This is an important level to keep an eye on because if it is scaled, the THETA/USDT pair may reach $0.76. This positive view will invalidate in the near term if the price turns down and plunges below the 20-day EMA. That opens the door for a potential retest of $0.57.
The 4-hour chart shows that the bears are protecting the overhead resistance at $0.65. If buyers want to sustain the bullish momentum, they will have to drive THETA price above $0.65. If they do that, the pair is likely to start a new up-move toward $0.70.
The 20-day EMA is the important support to watch for on the downside. If bears sink the price below this support, it will indicate that the bulls are closing their positions. The pair may then descend toward the support at $0.58.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
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Mortgage rates get close to the yearly high of 7.49%
Mortgage rates started the week at 7.28%, got as high as 7.47%, and ended at 7.39%. That’s close to the yearly high of 7.49%.
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Mortgage rates shot up last week after a hawkish Federal Reserve meeting, even though they didn’t raise rates. In addition, jobless claims data had another solid print, showing that the labor market hasn’t broken yet, which led to more selling of the 10-year yield. Mortgage rates did find some relief on Friday as bond yields headed lower.
On housing inventory, new listings data saw a small decline last week, but active listings grew at a healthy clip. Purchase application data had another positive week, pulling off back-to-back positive prints.
Mortgage rates and the bond market
Last week was wild for the 10-year yield, as the key support line that I have been talking about for weeks broke after the Fed meeting, sending the 10-year yield to highs last seen in 2007. The 10-year yield fell on Friday, bringing some relief, but we got very close to yearly highs for mortgage rates. Mortgage rates started the week at 7.28%, got as high as 7.47%, and ended at 7.39%. The yearly high is 7.49%.
I have noticed for weeks now that the spreads between the 10-year yield and mortgage rates are better, so rates didn’t hit new highs last week, even with the 10-year yield breaking to new yearly highs.
The Fed sounded hawkish in their talk on Wednesday, but their rate hike cycle is over now, with the possibility of only one more rate hike if they think it’s warranted. The labor market isn’t as tight anymore, but jobless claims had another solid print and are near monthly lows. The four-week moving average for jobless claims is 217,000 — far from the key level of 323,000 level that I think would trigger a Fed pivot.
Weekly housing inventory data
Whenever mortgage rates rise, I fear that the weekly new listings data will decline more aggressively because homebuyers simply throw in the towel on listing their homes to sell because higher rates make it less attractive to sell and buy another home
Last week on CNBC, I talked about how I still believe that we will see some flat to positive year-over-year data because we have had to deal with higher rates for longer and we haven’t see new listings data take a meaningful fall lower. A lot of this has to do with this data line trending at the lowest levels ever. I explained my premise here in this interview on CNBC.
We have had some volatile weekly numbers in the new listings data recently, but even with the mortgage rate spike, the decline was orderly, as it has been all year. So, I am not worried about another leg lower in the data.
- Sept. 15: 61,852
- Sept. 23: 59,107
There is some positive news: weekly active listings grew 9,312. This is not at the levels that I think we should see with mortgage rates this high, which would be between 11,000-17,000 weekly, but it’s good enough, considering that we are almost done with September. I am a very pro-supply person because more supply brings balance. It’s been hard to grow the housing supply this year as home sales are stable compared to last year’s massive collapse in demand.
According to Altos Research:
- Weekly inventory change (Sept. 15–22): Inventory rose from 518,626 to 527,938
- Same week last year (Sept. 16-23): Inventory rose from 552,042 to 556,865
- The inventory bottom for 2022 was 240,194
- The inventory peak for 2023 so far is 527,938
- For context, active listings for this week in 2015 were 1,198,033
Historically, one-third of all homes have price cuts every year. Last week’s price cuts were lower than last year at the same time by 4%. This is happening with rates over 7%, too, and part of the reason is that housing inventory has been negative year over year since mid-June. Last year, inventory grew fast as the mortgage rate shock toward 7% created faster and higher price-cut data.
The housing market still has major affordability issues, and we are seeing a higher number of price cuts than in 2015-2017. Back then, we ran at 33%; in 2018 and 2019, it was 36%.
- 2021 28%
- 2022 41%
- 2023 37%
Purchase application data
Purchase application data was 2% higher last week, making the year-to-date count 17 positive prints, 18 negative prints, and one flat week. If we start from Nov. 9, 2022, it’s been 24 positive prints versus 18 negative prints and one flat week. The week-to-week data has gotten softer since mortgage rates have been trending above 7%. However, it’s not crashing like it was last year.
The week ahead: Housing and inflation data
We have another week of housing data ahead with new home sales, pending home sales, the S&P CoreLogic Case-Shiller home price index and the FHFA home price index. The pending home sales data should come in soft with the recent spike in mortgage rates. Also, we have the PCE inflation report, the main inflation data that the Federal Reserve tracks. As always, the Thursday jobless claims data is the key for this cycle and mortgage rates.
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I Say We’re Setting Up For A Major Bottom
It’s almost impossible to call market tops and market bottoms using basic technical analysis tools like price and volume. Don’t get me wrong, that combination…
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It's almost impossible to call market tops and market bottoms using basic technical analysis tools like price and volume. Don't get me wrong, that combination is my favorite during trend-following periods. But trying to spot bearish reversals is difficult when price action keeps riding higher and higher. The same is true in trying to spot bullish reversals when prices keep moving lower and lower. Maybe that seems unconventional to hard-core technicians, but I believe it's the reality. Too many folks say "when this line crosses that line, then this will happen". To me, that's following technical analysis and wearing blinders. Just my two cents.
I use technical price action to confirm what other signals are suggesting. We get plenty of signals on a regular basis - some short-term in nature, others long-term - if we're only willing to listen. While I've been bullish since June 2022, I do recognize short-term warning signals that tell us that risks of remaining long have increased substantially. In mid-July, I turned very cautious short-term and discussed those signals in a "Your Daily 5" episode that aired on July 19th. Let me pull up an S&P 500 chart, so you can see where U.S. equities stood when I fired this warning shot:
There were several reasons for the stock market bulls to hit quicksand. Tesla (TSLA), a Wall Street darling and a favorite stock of mine, suggested a possible 20% drop. That call aired the day of TSLA's top and TSLA fell closer to 30% in less than one month. These signals work and help us to manage risk! As I always say, they do NOT guarantee future price action, but they make us aware of increasing risk and that's how you invest more successfully. Since that July top, I've encouraged our EB members to tread very cautiously, whatever that means to each individual member. To some, it's being in cash. To others, it might simply mean to avoid leverage on the long side. But this cautious period is coming to an end.
If you want to see what was discussed on July 19th and why I felt the stock market was in short-term trouble, check out the Your Daily 5 recording on YouTube!
I absolutely LOVE when my signals take the opposite view of the masses. And now that everyone believes we're resuming the prior bear market, my signals are saying HOGWASH. Could we continue to proceed lower? Sure. There are never any guarantees with the stock market. But I see signs that suggest shorting is a VERY HIGH RISK strategy, with those risks growing every day. I'm discussing one major reason why in our FREE EB Digest newsletter that will be published early Monday morning, before the stock market opens. If you're not already an EB Digest subscriber, it's 100% free with no credit card required. Simply CLICK HERE and enter your name and email address. I'll discuss Reason #1 to turn bullish tomorrow morning. And I'll also focus on other reasons to be thinking bullish thoughts when I publish the EB Digest on Wednesday and Friday. Don't wait until it's too late. Check them out NOW!
Happy trading!
Tom
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