Warren Buffett Positioning for Rising Rates

Warren Buffett is the guy who said “be fearful when others are greedy, and greedy when others are fearful.”  In today’s environment, fear is reflected by the ridiculously low bond yields that investors are prepared to accept rather than investing in equities or other risky assets.  It is not terribly surprising then, that Buffet is tweaking Berkshire’s bond portfolio to reflect an expectation of inflation and rising interest rates.  This article notes that Berkshire’s bond portfolio has shifted towards shorter-maturity bonds, which are less sensitive to a rise in rates than longer-maturity bonds.

The article linked above is from The Motley Fool (TMF).  The one beef that I have with this article is that it reinforces the incorrect idea that stocks are a ‘hedge’ against inflation.  This is a common mis-perception.  While it is true that over long periods of time stocks have tended to generate higher returns than bonds and thus to offset the eroding purchasing power of inflation, there is not a good correlation between inflation and stock returns.  For a real hedge against inflation, you should use real return asset classes, such as, for example, REITs, TIPS and commodities.

Photo: Warren Buffett and President Obama spoke for an hour July 14, 2010 in the Oval Office

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About Geoff Considine

After earning his Ph.D. in Atmospheric Science, Geoff worked for NASA for 3 years, leaving to become a quantitative analyst developing trading and portfolio management solutions for an energy trading firm. In 2000, Geoff became a consultant focusing on quantitative methods in portfolio management. Geoff founded Quantext in March 2002. Geoff has published commentary and analysis in a range of publications. Quantext is a strategic adviser to FOLIOfn,Inc. (www.foliofn.com (http://www.foliofn.com)). Neither Quantext nor Geoff Considine is an investment advisor.

2 thoughts on “Warren Buffett Positioning for Rising Rates

  1. Enigmaman

    Geoff,nice post, will you be doing more detailed pieces on inflation hedge investing, expanding on what you discussed here?

  2. Geoff Considine Post author

    I plan to examine inflation hedging strategies in future posts. One nice test for the interest rate exposure for a portfolio — a measure of how it will respond to changes in interest rates is to correlate the returns on a portfolio to ^TNX (Yahoo! Finance ticker), which is a CBOE index that tracks the 10-year government bonds yields. A positive correlation means that your portfolio tends to do better with rising rates, and vice versa.

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