How investors should look at economic trends and forecasts?

Do investors need to keep an eye on and care about the trend of the overall economy?

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Retail investors cannot change overall economy

When I was very young, influenced by the media and textbooks, I also felt that I should pay attention to the overall economic development. But after years of experience, I found that this is not the case. My opinion is: now is the era of information explosion, we will get any news about the general economy almost simultaneously; but the important thing is that most of us are helpless to general economy (for example, in a bull market or a crash, all stocks will be together rising and falling sharply, retail investors are unable to cope with it).

So my own experience is: focus on the business, competitiveness, market share, and development of the industry of individual companies, especially the fundamental research that investors can control. It will be more practical to work harder to study.

Buffett’s comments

Buffett once said, “If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do.” Buffett’s investment approach is very consistent: Ignore the stock market. Rise and fall, do not worry about changes in the economic situation, do not believe in any predictions, do not accept any inside information, only pay attention to two points: what stocks to buy, and the purchase price.

In Buffett’s 1996 shareholder letter, he made a more explicit statement: Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.

Buffett visited Japan in April 2023 and said in an interview with CNBC on April 12, “I would say that I’ve been in business, running Berkshire for 58 years, and I’ve never opined an economic forecast of any use to the company. And all you have to do is keep running every business as well as we can, and we got to keep plenty of cash on hand so that people are going to keep making intelligent decisions, rather than those forced upon them. And that’s all we know how to do. And if I depended in my life on economic forecasts, you know, I don’t think we’d make any money. I don’t know how to do it. And, you know, people want to get them, so they get them. But it has no utility. When I find one of our companies has hired somebody to tell them what’s going to happen in the economy, I mean, they’re throwing’ their money away as far as I’m concerned.”

What about economist Keynes?

Especially any predictions, don’t bother about it. Keynes is the most respected master of general economics in modern times. The economic policies of modern countries are almost all implementing Keynes’s theory. Buffett mentioned that he was full of praise. Keynes himself is a master of general economics, and he persuaded investors not to believe any predictions. To paraphrase Keynes’s words “We simply don’t know.”

Ignore the so-called financial experts’ remarks

The U.S. stock market has been bullish for more than ten years. From time to time, so-called investment experts on Wall Street warn that U.S. stock indicators are in a bubble. They also vowed to 100% guarantee that as long as the Federal Reserve decides to raise interest rates, the S&P 500 Index will be an avalanche. The formula plummeted by more than 40%, urging investors to start adjusting their current holdings.

For similar news, I don’t think investors need to pay any attention to it. These remarks will only waste your time and, in serious cases, will interfere with your investment strategy. Do you think these so-called experts will be smarter than Buffett or Keynes?

Investors don’t have to worry about these noises at all

I have only three points:

As an investor, it’s right to be humble and stay humble with the market at any time.
Buffett said something like “Forecast the market, that is what God is doing.” and “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
If you are a long-term investor, short-term large fluctuations or crashes provide investors with a rare opportunity to enter the market and pick up the bargain. Investors should be happy instead.

Let me quote a sentence from Buffett’s letter to Berkshire’s shareholders in 1994 to share with you, “We will continue to ignore economic and political forecasts, which are an expensive distraction for many investors and businessmen.”

Short-term market forecasts are poison

In Buffett’s letter to Berkshire’s shareholders in 1992, he wrote: Making the first prediction goes somewhat against our grain: We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. However, it is clear that stocks cannot forever overperform their underlying businesses.

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