Buffett's Track Record Spotty On Bonds

by: Learn Bonds

Is Warren Buffett, the chairman of Berkshire Hathaway (NYSE:BRK.A), a smart bond investor? Buffet recently sold off much of his exposure to the municipal bond market. If he has a good track record for predicting broad bond market moves, you might be tempted to follow his example and sell municipal bonds. However, our research shows that investors who sell municipal bonds based on Buffett's move would be making a mistake. Here's why:

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

Our conclusion: While Buffett has been great at picking individual bond issues, he has been consistently wrong about broad market bond trends for over 30 years.

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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

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As he watched the bond market head higher and higher after his 1979 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 1987 and 1988 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.

Junk Bond Market 2003 to 2012

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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 it's now over 4 years later and we have been headed higher still ever since.

30 Year Treasury Bond Chart, 2008 to Present

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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."

It's 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. With this in mind, investors may want to think twice before writing off the municipal bond market based on Buffett's recent move.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.