Buffett says it’s ‘almost certain’ stocks will beat bonds over long term if rates, taxes stay low

Warren Buffett says stocks are the place to be invested in for the long haul if interest rates and corporate taxes remain near current levels.

“If something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments,” Buffett wrote in his annual letter to Berkshire Hathaway shareholders, which was released Saturday morning.

The letter also pointed to more exposure for two of his potential successors and addressed the company’s inability to find an attractive, monster-sized acquisition target, which the ‘Oracle of Omaha’ has been known for.

Stocks got off to a hot start in 2020, with the S&P 500 and other major U.S. averages reaching all-time highs. Last year, the S&P 500 surged more than 28% to keep the longest bull market in U.S. history going.

The market got a boost from low interest rates from the Federal Reserve during this bull run, pushing bond yields lower and making equities a more attractive investment. The market got another jolt at the end of 2017, when the Trump administration slashed the U.S. corporate tax rate to 21% from 35%.

These elements, coupled with the “American Tailwind,” will make “equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions,” Buffett said.

The investing legend, however, offered a big caveat to his prediction: “Anything can happen to stock prices tomorrow.” He noted that occasionally, “there will be major drops in the market, perhaps of 50% magnitude or even greater.”

In the letter, the Berkshire chairman and CEO noted that Berkshire executives Ajit Jain and Greg Abel will answer questions at the company’s annual shareholders’ meeting in May.

This will be a departure from the meeting’s traditional format, which typically consists primarily of Buffett and Berkshire Vice Chairman Charlie Munger taking questions. Buffett said this change makes “great sense.”

However, the change comes amid growing frustration over a lack of a more formal announced succession plan. Buffett, 89, has hinted at Jain or Abel possibly taking over for him.

Both Jain and Abel were promoted in 2018. Jain currently runs all of Berkshire’s insurance-related businesses, while Abel handles all non-insurance operations for the conglomerate.

Buffett lamented once again in the letter that Berkshire has still not found an attractive acquisition target to spend the company’s massive cash hoard on.

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