(Noted News) — In his annual letter to shareholders of Berkshire Hathaway, Warren Buffett said those with a reliance on fixed-income, like pension funds, insurance companies, and retirees, are going to have a tough time in the future because of the historically low return on government bonds.
Buffett owns 100% of GEICO insurance, but notes that the sheer size of the company and its subsidiaries, combined with the amount of cash flow he gets from his other holdings, allow it to be profitable despite the extremely low interest rates and high inflation.
“Overall, the insurance fleet operates with far more capital than is deployed by any of its competitors worldwide. That financial strength, coupled with the huge flow of cash Berkshire annually receives from its non-insurance businesses, allows our insurance companies to safely follow an equity-heavy investment strategy not feasible for the overwhelming majority of insurers. Those competitors, for both regulatory and credit-rating reasons, must focus on bonds.”
In Buffet’s 1982 letter to shareholders, he lauded the effectiveness of a 10-year treasury bond that yielded almost 16% in returns. Forty years later, at age 90, the Oracle admits bonds are virtually useless.
“And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond–the yield was 0.93% at year end–had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide–whether pension funds, insurance companies or retirees–face a bleak future.”
Buffett says that some insurers or bond investors may try to counter the “pathetic returns” by shifting their purchases to obligations backed by riskier borrowers for the higher interest. But the Berkshire Hathaway boss says that “risk loans, however, are not the answer to inadequate interest rates.”
“Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim.”
Buffett says what does work is investments in productive, tangible assets:
“Productive assets such as farms, real estate and, yes, business ownership, produce wealth—lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification, and a minimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts.”