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Bonds & stocks Michel Pireu     | Business Day Wednesday, November 28, 2018
Warren Buffett explains the relationship between bonds and stocks in a CNBC interview:

If you buy a 30-year government bond, it has a whole bunch of coupons attached... And the coupon says 3%, or whatever. And you know that's what you're going to get between now and 30 years from now. And then they're going to give you the money back. What is a stock? A stock is the same sort of thing. It has a bunch of coupons. It's just they haven't printed the numbers on them yet. And it's your job as an investor to print those numbers on it. If those numbers say 10% and most American businesses earn over 10% on tangible equity. If they say 10%, that bond is worth a hell of a lot more money than a bond that says 3%. But if that government bond goes to 10%, it changes the value of this equity bond that, in effect, you're buying...when you buy an interest in anything, you are buying something that, over time, is going to return cash to you...And those are the coupons. And it's...your job as an investor to decide what you think those coupons will be because that's what you're buying. And you're buying the discounted value. And the higher the yardstick goes, and the yardstick is government bonds, the less attractive these look...So in 1982 or '83, when the long government bond got to 15%, a company that was earning 15% on equity was worth no more than book value under those circumstances because you could buy a 30-year strip of bonds and guarantee yourself for 15% a year. And a business that earned 12%, it was a sub-par business then. But a business that earns 12% when the government bond is 3% is one hell of a business now. And that's why they sell for very fancy prices.
 
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