Thursday, June 9, 2011

Buffett on Macro Forecasts: Berkshire Shareholder Letter Highlights

Warren Buffett wrote the following in the 1994 Berkshire Hathaway (BRKashareholder letter:

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

These comments by Buffett are worth considering the next time one of the many who are in the business of making macro forecasts opines on business news.

At the very least, remember it the next time someone confidently predicts what the macroeconomic future will be and then makes a specific investing strategy recommendation based upon it.

Adam

Long BRKb
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