Buffett on the Failings of Market Forecasting

Market forecasting is when analysts make predictions about the stock market, or even about individual companies. These predictors often profess to have some insider knowledge and claim to know what the market is going to do. And much like weather forecasting sometimes they are right, and sometimes they are wrong. Billionaire Warren Buffett, however, doesn’t listen to such things.

Buffett’s mentality, which he has shared multiple times over the years, is that it’s simply laughable to believe anyone can predict what will happen; and, in fact, he doesn’t even try. After all, trying to make decisions on someone else’s guesswork is silly. Following the crowd is never a good idea, and there’s no one who can predict what the market will do.

When Buffett first went into the investing business, he listed out some “Ground Rules” for the people he invested for, and one of them dealt directly with market forecasting:

Ground Rule No. 6: I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.

Buying or selling a stock based on the predictions of others makes zero sense. In his 1966 shareholder letter, Buffett spoke at length about the ludicrousness of market forecasting. In that letter, Buffett points out something that he’ll spend the next fifty years repeating: that it’s not about when the market is up or down. It’s about whether the company performs as expected, even if it takes a little longer to get there.

The course of the stock market will determine, to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on what should happen, not when it should happen.

Buffett goes on to point out that the market will occasionally go up and back down again; the important thing is whether the business will, over time, perform as expected. It might not happen in a year (after all, who is to say it has to be in a year) but Buffett has always been in things for the long term, so that doesn’t matter. The important thing isn’t how long it will take—it’s that the outcome will be good eventually.

If we start deciding, based on guesses or emotions, whether we will or won’t participate in a business where we should have some long run edge, we’re in trouble. We will not sell our interests in businesses (stocks) when they are attractively priced just because some astrologer thinks the quotations may go lower even though such forecasts are obviously going to be right some of the time.

Similarly, we will not buy fully priced securities because “experts’ think prices are going higher. Who would think of buying or selling a private business because of someone’s guess on the stock market?

According to Buffett, this idea is articulated in chapter 2 of Buffett’s favorite book, “The Intelligent Investor” by Benjamin Graham, and he frequently recommends it as a reading to any investor interested in the idea of value investing. Buffett has often lauded it as one of the most influential books he’s read, and a must-read for anyone interested in understanding how stocks and investing works.

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