Yesterday we took on the basics, today we will go after something a little more sophisticated which is the bare bones reality that the Wall Street gurus are almost always wrong. But we should be grateful for this since we couldn't possibly make money otherwise for if the forecasts were always right, stock prices couldn't move at all. Let's face it - valuations are based on expectations, not performance. When the actuals exceed these expectations, the price goes up, and down when they are below. This topic is now taken on by none other than the great Warren Buffett.  Or as the great screenwriter William Goldman once wisely said, "Nobody knows anything."  

Thursday, February 29, 2024

Warren Buffett on Why You Shouldn’t Trust Forecasts

If you could reliably predict tomorrow's stock market winners, would you freely share your valuable insights with others? Warren Buffett raised the subject of forecasters and pundits in his latest Berkshire Hathaway shareholder letter. (I am a longtime Berkshire Hathaway shareholder.) The context for the above question came from Buffett's description of his sister, who he described as instinctively knowing that “pundits should always be ignored.” Buffett analogized having the ability to “reliably predict tomorrow's winners” and then sharing their names as akin to “finding gold and then handing a map to the neighbors showing its location.”

The difficulties of forecasting are not just related to picking short-term winners among stocks. It's also challenging when trying to identify a long-term investment. “Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes,” observed Buffett. “It's harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake oil salesmen.”

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