I read an interesting article the other day that is great food for thought. Warren Buffett writes a letter every year for Fortune magazine that is like a little chat. He explains “complex” investing terms or scenarios into a language anyone should be able to understand. The article from businessinsider.com is just a preview, but I found it so enlightening.
A basic breakdown is that though many people find cash the least riskiest investment, it’s one of the worst. I find it to be a comfort blanket for people. Something they’re use to and comfortable with and just really don’t want to part with. The reason Buffett says it’s one of the worst investments is because of INFLATION. I know, it’s a horrible, horrible word so we’ll just call it the “I” word from now on. He points out that the value of a $1 from 1900 has the equivalent spending power in 2012 as 3.8 CENTS. That’s pretty depressing. So for all those grandparent and great grandparents that stuffed mattresses and other poor furniture with cash, it’s not worth too much (not assuming it’s a collectible now).
Stocks, on the other hand, people are scared of because of the big crashes and the huge losses we see on TV. However, from just comparing the stock market in 1965 to now, the stock market is up 13X. That can really put the past few crashes into a bit of perspective. If you’re using the stock market for a long term solution, just keep trucking.
Now he goes on to say that cash has it’s place and he keeps a lot on hand knowing that the value will be depleted due to the “I” word, but it’s just a piece of his diverse portfolio puzzle. Whether it’s to maximize the stock market when it’s down (buying low) or cashing out the stock market (selling high) so that he can flip another stock, every type of investment has its place and you just have to understand what that means for your personal investments.
So what are your thoughts? Do you think Warren is off his rocker, or do you see some value in what he writes?
I’d love to hear your thoughts and comments!
Until next time loyal readers,
Solutions Engineer
