The Last Asset Buffett Would Buy

Thank goodness May is almost over. If I never read another article about “Selling in May” ever again, it still won’t be long enough.

What is it about the fifth month of the calendar year that brings out the worst in financial journalists? Why do they persist in trying to resuscitate – even if it is to knock down – the pointless Victorian adage?

Adage antidote

So as an antidote to the absurd saying, I am, instead, going to talk about the things that you should consider selling in May.

Yes, what to sell in May and go away…and don’t buy them again for forever and a day?

Top of the list are bonds.

There are a few things we should note about bonds. Essentially, they are loans. When we buy bonds, we are effectively lending money to someone.

How much risk?

As a lender, the bondholder receives interest. This is supposed to reflect, firstly, the amount of risk for lending the money. Secondly, it should reflect the time that it will take for the money to be repaid.

The riskier the loan, the higher should be the rate of interest charged.

Additionally, the longer the period to repay the loan, the greater should be the interest charged too. After all, the longer the duration of the loan, the likelier it is that something horrible might happen.

So picture this.

Imagine breezing into your bank one Monday morning to see a loan officer about a mortgage. Your credit risk is good. You have some money put aside for a deposit. You also have a decent job and you live below your means.

So, on balance there should be no reason on Earth why your request should be rejected.

Falling down laughing

But rather than asking how much interest you are going to be charged, you, instead, ask how much the bank will pay you for borrowing the money.

How long it will take before the manager falls off his or her chair laughing.

It is ludicrous in the extreme to expect to be paid to borrow money. It is a very neat trick if you can pull it off, though.

Yet that is exactly what some countries have managed to do. Austria, Belgium, Denmark and Germany are part of a delirious band of European countries that have negative bond yields. In other words, investors pay to lend them money.

Something has evidently gone very wrong. But don’t take my word for it.

The last asset

Warren Buffett recently said the last asset he would want to buy is the 30-year US Treasury bond. He went so far as to say that he would not even want to own a 10-day Treasury bond, [if it existed].

Peter Lynch has long expressed reservations about bonds, too, but he didn’t dismiss them outright.

Instead he said: “When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds.

Put another way, if investors become too overconfident about the stock market, then that could be the time to consider bonds.

As unlikely as that might seem today, it could happen one day.

But currently, bond yields are around 2% (if not negative). And notable blue chips such as SingTel (SGX: Z74), DBS Group (SGX: D05) and SGX  (SGX: S68) are yielding 3.8%, 2.8% and 3.3%.

It could be while before bond yields exceed dividend yield by 6%. So where is the logic in ditching stocks?

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.