Interactive Investor

Warren Buffett: Why shares are still better than bonds

5th September 2017 13:19

by Tom Bailey from interactive investor

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Billionaire investor Warren Buffett is still positive about the prospects of the US stockmarket, despite concerns of overheating.

Speaking to Bloomberg, Buffett said that while US stocks are expensive, they are a preferable investment to US bonds. While US equities "have gotten less attractive as they've gone along - they're still very attractive compared to bonds," he said.

When it comes to US bonds, Buffett made the point: "You pay 45 times earnings on a 10 year [US Treasury] bond and the earnings aren't going to go up."

Buffett's comments come at a time when the S&P 500 is enjoying its second longest rally on record. The index has been on an upward trajectory unabetted since March 2009.

According to the Cape measure, which uses price/earnings (PE) ratios to determine stock valuations, there are only two other times in history when the market has been this overvalued: before the crash of 1929 that set off the Great Depression, and before the Dot Com bubble burst in 2000.

In particular, US markets rallied upon the election of Donald Trump in November. It was hoped that the new president's promise for a large infrastructure investment programme and a series of tax cuts would be a boon to the US economy.

However, tied up with political scandals, the new president has failed to get much of his agenda off the ground. This has raised fears that the confidence among investors that allowed the market to rally so much over the past 10 months may soon start to wane.

Buffett, however, appears to remain confident. Of the $100 billion in cash or equivalents his company, Berkshire Hathaway, currently holds, he is looking to invest roughly 80%.

However, he noted that the high price of US equities right now meant that choosing where to invest has become harder. "Stocks won't earn more just because you pay more for them," he said.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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