The Billionaire Secret To Bond Investing: Why Warren Buffett Is Wrong

The Billionaire Secret To Bond Investing: Why Warren Buffett Is Wrong

bond investing secrets

Bond investing is one of those things that everybody has an opinion about. Some see it as a low-risk, safe investment, while others say why wait one year to get the return you can get in one day in the stock market.

Recently, legendary investor Warren Buffett made headlines when he said that long-term bonds are terrible investments. 

Some people may agree with him but our guest today don’t. Joseph Hogue from Let’s Talk Money YouTube channel and the author of step-by-step bond investing is here again to tell you why bond investing is not a terrible idea. 

Not only that, Joseph says that there’s a secret billionaire code when it comes to investing in bonds that we’ll discuss today. 

This is the second part of our bond investing series, where in the first one, we discussed the beginner’s guide to investing in bonds and how to get started in bond investing. 

In this one, we’ll go one step ahead and learn why long-term bonds might be a good idea and why billionaires actually like bonds more than equity. 

Why Bond Investing is Still a Good Idea

First of all, the reason why Warren Buffett is, all of a sudden, against bond investing is because he is trying to time the bond market.

Warren Buffett is saying that because interest rates are at historic lows, and right now, they can only go up, bond prices will go down.

We may also be experiencing some historic economic growth this year and over the next few years. So interest rates will definitely increase, and that generally means lower bond prices.

So if you’re buying a bond that you’re going to sell before maturity, then that might not be a good idea because the price will probably be going down. 

But the thing is, if you’re investing in bonds for the long-term and not to flip them at a higher price, then you are always going to get that guaranteed fixed income or fixed interest rate on those interest payments. 

You’re also going to get the amount or the value of those bonds back when that bond matures. So nothing has changed for you if you’re a long-term investor. 

Yes, the bond prices might go down in the market, but you don’t want to sell them. You don’t buy bonds to sell them in the near future and make a quick buck. That’s what stocks are for. When you buy bonds, you hold them for those interest payments and fixed income. 

What Warren is trying to say is in the next 10 years, stocks are probably going to be a better deal, but that doesn’t mean bonds are worthless.

And that is pretty acceptable because, over the last 30 years, bonds have had a really great bull market that a bear market is inevitable.

Why Bonds Seem So Unattractive to Common People 

The reason why bond investing seems so unattractive to a lot of people is because they expect their investments to give them enough returns equivalent to their primary income. 

Investing, in general, should not be considered as a cash flow. You still need to have your business, job, or whatever that you’re doing to generate that cash flow for you.  

Then, investing, whether it’s in stocks, cryptocurrency, or bonds, is going to be the backup or your safety net and something that is going to make your money compound and grow. 

The reason why you chase extravagant returns is that you want to make investing the primary source of your income, which is not what the goal of investing is.

Why Billionaires Are Attracted More Towards Bonds

One of the most amazing and most surprising insights into really how the rich invest and how the rich get richer, as they say, is they invest more in bonds.

Everyone thinks that the rich are investing in the stock markets and making billions here, but that is not true. 

A great survey was conducted by Scorpio Wealth Management on a little over 3000 millionaires across the world, asking how their investment portfolio is structured and what percentage is the allocation to each asset class. 

What they found was surprising to many people because the survey revealed that the millionaires actually have, on average, just 20-25% of their portfolio invested in stocks, while they had upwards of 35-40% of their portfolio in bonds and in cash, meaning they were playing super safe. 

The rest of their money was in their own business or other businesses and startups and other non-publically traded companies.

The genius of what makes the rich richer is that they take the majority of their risk in their own business or businesses they invest in. They’re using bonds and cash to balance out that risk in their financial lives. 

They make money doing what they do best, which is running their own businesses, and then they use their investments just as savings account with a great interest rate. 

How Much Should You Allocate to Bonds

How much should you allocate to bonds, or any asset for that matter, depends on multiple factors such as your age, your personal risk tolerance, your financial goals, etc.

But we can do a little bit of generalization and assume some things for the sake of an example. Let’s say you own your business, you’ve got stocks, you’ve got real estate, and some alternative investments such as cryptocurrency.

If you own a business, and even if cash flows are really good, there’s always that business risk. So you might want some safety and stability in your portfolio. Thus, your bonds and cash allocation can be high. 

Even a 30-35% of total portfolio allocation towards stocks will be good enough. That too, you can skew towards a little safer sectors like utilities, customer staples, and dividend stocks. 

Companies like Walmart, Pepsi Co., Cocacola are ideal because they will provide a consistent rate of return without much risk. Yes, they might not make you rich, but you don’t care because you’re already getting rich from your business.

Your bond allocation, in this case, can be the same as the stock allocation, and the rest of your 30-35% portfolio can just be cash to serve as an emergency fund. 

Because God forbids if your business really needs that cash injection to be able to survive for a few months, you don’t have to liquidate those stocks and bonds to get that cash. 

For someone with a stable job and job security can take a little higher risk and allocate a little more in the stocks as compared to bonds.

Why Cash Is So Important In Your Portfolio

Many people don’t like to see cash just sitting around in their portfolio doing nothing. They want every penny to be working for them. 

But here’s a fact, almost every successful investor has at least 20-30% of his portfolio in cash. Warren Buffett always likes to have $100 billion sitting in cash.

The reason why cash is still the ultimate safety net is that it is the only asset that is going to maintain and hold its value no matter how panicky the scenario is. 

If you remember the Coronavirus panic of March 2020, every single asset, including stocks, bonds, crypto, gold, fell at least for those 3 weeks. 

If you need cash at that moment, you would have had no option but to sell those assets in loss and get them liquidated. 

So no matter if you’re in a job or a business owner, you always need that safety net. And nothing can be a better safety net than cash, not even bonds.