Spot the error in Warren Buffett’s logic

March 8th, 2009

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In Warren Buffett’s latest shareholder letter, he said that,

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgement confirmed when they hear commentators proclaim ?cash is king,? even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Currently, as we said before in Why are nothing-yielding US Treasuries so popular?,

One of the thing that confounds us is the fact that short-term US government bonds are yielding almost nothing. A 10-year US Treasury bonds yields a measly 2.79% while a 30-year bond yields 3.57%.

Therefore, on that paragraph alone, we agree with Warren Buffett. That’s the main idea of our earlier article, If you save, government will wage economic war on you. But assuming that this is true, what is the implication for investors? Did Warren Buffett mean that investors should shift from cash to stocks?

If the answer to the second question is “Yes,” we can’t help but notice a flaw in his logic here. We will turn over to our readers to spot the flaw at our discussion forum. The first person who spot it will be given a pat on his/her back and be quoted! 🙂

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