Buffett’s Bond Track Record Is Spotty

Many people often wonder whether or not Warren Buffett (who is the chairman and CEO of Berkshire Hathaway) is a smart bond investor. Just recently, Warren Buffett sold off a large chunk of his company’s exposure to the municipal bond market. Many people might be tempted to follow the example of Warren Buffett if they knew he had a great track record when predicting the overall broad bond market. But research shows us that any investors who sell their mutual bonds according to the move that Warren Buffett recently made would be making a major mistake. Here’s the reason why:

In 2008, Warren Buffett wrote a letter in which he negatively expressed these sentiments about municipal bonds when he sent this letter out to shareholders. As I’m sure you probably know, he is known for writing legendary letters to his shareholders that provide a tremendous amount of market insight and they are also very direct. Researchers took the time to look through these letters to find out the different predictions Warren Buffett made over the broader bond market, and whether or not his predictions have stood the test of time.

The conclusion of this research shows us that Warren Buffett has had an excellent track record with picking his own individual bond issues, but he has actually been wrong quite often when predicting the overall trend of the bond market over the last 30 years.

He stated in a 1979 letter that “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.”

What you might not realize is that Buffett made this statement in his letter at a time when the bond market began its biggest bull market in its history. It steadily rose from the years 1979 to 2012.

Warren Buffett did not choose to comment on the bond market for many years after he saw that his first prediction did not come true in 1979. He does mention the bond market as a whole several years later, and even though the bull run had been going strong for about eight years, he change his mind on the overall market at all. He is very bearish on the bond market in both his 1987 and 1988 letters, as you will soon see.

In his 1987 letter, he stated that “we continue to have an aversion to long-term bonds.”

In 1988, he stated “our WPPSS experience, though pleasant, does not alter our negative opinion about long-term bonds.”

Warren Buffett does not make another broad statement about the bond market for many years to come, but the next time he does his during a 2003 letter where he specifically talks about junk bonds.

In that letter and 2003, he stated “… This sector [junk bonds] now looks decidedly unattractive to us. Yesterday’s weeds are today being prices flowers.”

But the reality of the situation is that junk bonds began to go really high in price during 2003, briefly dipped in price during the financial crisis, and then continued to perform in a stellar fashion all the way up to this very day.

Buffett spoke about the overall bond market again during his 2008 letter to the shareholders, and this time he was speaking broadly about US treasuries.

He said that:

“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 2000’s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”

If you were to look at 30 year treasury bond chart from 2008 to the present, you will obviously see that these bonds have been heading higher quite a bit over the last four years.

Buffett also made one final comment in regards to the whole of the broad bond market in his most recent shareholder letter during 2011.

He said:

“Right now bonds should come with a warning label. Today, a wry comment that Wall Street are Shelby Cullom Davis made long ago seems apt: ‘Bonds promoted as offering risk-free returns are now priced deliver return free risk.’”

It’s much too early to tell if Warren Buffett is going to be proven wrong or right with his latest 2011 bond market prediction. If you are an investor in the bond market, you may not want to follow the advice of Warren Buffett since his overall predictions have been wrong over the last 30 years or more. You obviously want to take what he says into consideration, but way your own options and make the judgment call for yourself.

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