Value Investors Tribe

In 2011 Berkshire Hathaway Annual meeting, Warren Buffett described three different types of asset classes which broadly cover most of the investing opportunities available for an investor. He also shared some thoughts on which one he prefers to invest in and his rational for the same.

The first type of asset class which Warren talks about is anything that can be denominated in currency. It includes cash, bonds, bank deposits, money market fund or anything similar. Regarding this type of investments, Warren explains, “Almost all currencies have declined in value over time.” This clearly suggests that Warren is not a fan of these type of investments since historical track record is not lucrative. It is important to note that Warren looks at these investments with a long time horizon and in the short run, investor might find some lucrative opportunities to invest in this asset class.

Second asset class Warren talks about are items that an investor buys which does not produce anything but the investor hopes that someone will pay more for the same later on. Warren says. “The classic case of that is Gold.” Warren says that even though investors around the world try to find some value in this type of investments, investors undermine the fact that these assets are not going to do anything for them. He explains that you can own all the gold available in the world and then store it, sit on it, fondle it or do whatever but you are not going to make money on it until you find someone who is willing to pay higher price, for whatever reasons, that your purchase price. These assets includes commodities such as gold, bitcoin (as per Warren!), potentially NFTs and other similar non-producing assets.

Third type of asset which Warren describes are assets that will produce something in future. This can include assets such as farms, apartment buildings, businesses etc. Warren further explains, “You decide how much you pay (for the asset) based on how much you thing the asset itself will deliver over time and those are the assets that appeal to me and Charlie.” Warren further expands by saying that based on how much the asset will produce, may it be a farm or a business or something similar, and what kind of costs you are expected to incur in future, an investor can make estimates of the value of asset. This is the same approach with which Warren pursues his investments, may it be in stocks or buying entire businesses. He looks at the expected yield or what the asset will produce in future, cashflows and earnings in case of businesses, and makes judgment about its valuation.

Key Takeaways:

1. For an investor, broadly classifying, there are three asset classes: 1) currency related 2) non-producing assets 3) producing assets.
2. Warren and Charlie prefer investing in third type of asset classes, this includes mainly businesses which are expected to produce cashflows and earnings in future.
3. What asset classes have you invested in?