Buffett on stocks

I believe stocks are “the runaway winner” over bonds and gold, and “will be by far the safest” investment in the long run, said Warren Buffett in Fortune. He considers bonds such dangerous assets that they “should come with a warning label.” They’re tied to interest rates that are so low right now that they can’t even cover losses from inflation and taxes.

His take on gold is enlightening, also. According to Buffett, investors should avoid gold, which will “never produce anything.” It’s far better to invest in companies or farmland, both of which actually create new wealth. All the world’s gold, melded together, would form a 68-square-foot cube, worth about $9.6 trillion. Would you rather have that cube, or its dollar equivalent: all the cropland in the U.S., plus 16 Exxons (the most profitable company in the world), with $1 trillion or so left over? We think the choice is obvious. So doesn't Buffett.

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Farmland: Strong Fundamentals and Good Prospects

What attracts investors to farmland? In a word, fundamentals. Rising food prices driven by expanding populations and the increasing wealth in emerging-markets have caught the attention of investors. Consumers in developing nations increasingly have the income necessary to purchase beef, poultry, and other similar products. This has placed a considerable strain on the global agriculture infrastructure, as these food products take more land and other resources to produce the same amount of calories than traditional crops, such as wheat and rice. As a result, the value of farmland has strong underpinnings many expect will hold for the long term.

Another draw is the prospect of inflation. Although farmland is considered an illiquid investment, it is also viewed as a safe haven because of its history as an inflation hedge. Recent economic and geopolitical events have led investors to seek so-called “safe-haven assets” as a means of protecting their purchasing power from the dual ravages of inflation and asset-price depreciation. Investors rely on such assets to provide strong and consistent returns regardless of the inflationary and economic environment.

In the past, Treasury bills, precious metals, and other commodities have been considered safe havens. However, more recently, they have failed to provide all the necessary characteristics. Although other assets have some of the characteristics, few can match the ability of farmland to deliver strong returns in times of economic growth and contraction. Furthermore, the tangible nature of farmland and its role as a productive asset are two factors that combine to make the investment unique among all safe-haven opportunities.

From 1992 through 2011, total returns for the US National Council of Real Estate Investment Fiduciaries Farmland Index shows only one negative quarter. For this reason, an additional benefit to investing in farmland is that it is not as volatile as other vehicles. With only one exception, farmland returns have been consistently positive.

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