Warren Buffett: Don't Worry About Economic Predictions

Economics is not a hard science

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May 03, 2019
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You would be forgiven for thinking that

Warren Buffett (Trades, Portfolio) is concerned with the state of the economy. As chairman of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), a gigantic conglomerate with revenues in the billions and almost 400,000 employees, surely he must be worried about interest rates and growth expectations? Not so. In a May 2 interview with Yahoo Finance Editor-in-Chief Andy Serwer, Buffett explained why he does not get bogged down with economic predictions.

It really doesn’t make a difference

None of this is to say Buffett doesn’t focus intensely on the future of his business. In fact, ignoring the noise from various economic forecasters probably gives him more time to focus on Berkshire. After all, time is money:

“Well, I look at a lot of figures just in connection with our businesses. I like to get numbers. So I'm getting reports in weekly in some businesses, but that doesn't tell me what the economy's going to six months from now or three months from now. It tells me what's going on now with our businesses. And it really doesn't make any difference in what I do today in terms of buying stocks or buying businesses what those numbers tell me. They're interesting, but they're not guides to me.

If we buy a business, we're going to hold it forever. So we're going to have good years, bad years, in between years, maybe a disastrous year some year. And we care a lot about the price. We do not care about the next 12 months.”

They’re just guessing

The reason Buffett ignores economic predictions goes beyond time-saving. He mistrusts predictions because they often constitute nothing more than guesses:

“They make guesses. And there's so many variables. In the hard sciences, you know that if an apple falls from a tree that it isn't going to change over the centuries because of anything or political developments or 400 other variables that go in. But when you get into economics, there's so many variables.”

In other words, it’s not just individual economic forecasters tend to be wrong often, it’s that the entire discipline of economics lends itself poorly to prediction. As Buffett says, in the hard sciences conditions are easily replicable, and natural phenomena consistently obey the same laws. This is not so in finance.

The truth of the matter is, no matter how rigorous the models and how complex the mathematics, any discipline that concerns itself with human behavior (and that is all that economics and finance really is) is always going to have a baked-in level of uncertainty. Indeed, attempting to pretend that this is not the case is likely to blind you to the unknown. Better to admit ignorance than pretend you can predict the future.

Disclosure: The author owns no stocks mentioned.

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