Ignore Political And Economic Forecasts: Mind Your Owned Businesses

Introduction

In his Berkshire Hathaway 1994 annual report Warren Buffett said ignore political and economic forecasts. I considered this one of the more profound pieces of investment advice and wisdom that I ever came across.  It has been my opinion prior to and since I read this advice that investors spend way too much time and energy worrying about things that really don’t – and shouldn’t – matter.  I have learned that it is futile to attempt to predict future political, economic or market directions and magnitudes.  Nevertheless, most investors seem almost obsessed with trying to do it.

Additionally, it is my humble opinion that investors also place too much importance on evaluating their portfolios based solely on what the current market price shows.  Market value is only one of many ways to evaluate how your portfolio is performing.  Furthermore, I believe that most of the other ways are more important.  Current market value and the intrinsic value of your portfolios are often quite different.  To my way of thinking, current market value tells you more about your current liquidity than it does the true value of what you own.

Stated differently, market value often either overstates or understates the true value of the businesses that you own.  Consequently, I consider it significantly more important and intelligent to assess the value of your businesses based on sound principles of business, economics and accounting (fundamental values).  Therefore, by knowing the true worth of your holdings, you can make more intelligent decisions as to whether you should be buying more, selling, or holding in relation to the market value.  To clarify, I do not believe in paying more for a business than it is worth, nor do I believe in selling a business for less than it’s worth.  Current market price rarely gives me the whole picture.

In addition to market price and the associated volatility, I also prefer to consider the operating results, which include the growth of earnings, cash flows and dividends.  To clarify, if earnings and dividends are growing and market price is inexplicably falling, I see this as a bargain.  On the other hand, if I see market values excessively high and fundamentals do not justify the lofty levels, I see risk and potential loss.  To summarize, I trust fundamentals more than I do emotionally-charged market behavior.

Nevertheless, the vast majority of investors that I have talked to see only the bottom line with little consideration, regard or concern about how well their businesses are performing.  Consequently, they tend to be inclined to want to sell when they should buy – and vice versa.  Additionally, most investors tend to worry about macroeconomic forecasts that are for the most part unpredictable, and rarely turn out to be accurate.

This is a soapbox that I have been standing on for many years (actually decades) with little success.  However, I consider it extremely important and therefore will never tire of singing the song of prudence and fundamental valuations.  In August 2011, I authored an article discussing these very issues.  With this article I am revisiting the message I delivered in 2011.  It’s important to recognize that this was a period of time where investors were still traumatized by the great recession of 2008.  The markets and the fundamentals were behaving quite positively, but investors were having trouble believing that the future could possibly be bright.  Yet, despite all these concerns, stock market performance since the spring of 2009 has been one of the best on record.

My Original Article Posted on 2011-08-10 With Edits and Updates Included

There’s certainly no shortage of pundits, prognosticators and even self-proclaimed prophets ready and willing to bombard us with dire forecasts about our future.  We get a day in the market like Monday, August 8, 2011, and “Chicken Little” shows up everywhere to include radio, television, newspapers, magazines and the Internet.  Yet somehow, we survive it all.  But no matter how often our so-called experts get it wrong, they remain steadfast in their desire to forecast our doom with their gloom.

It’s been more than 40 years ago when I first entered the investment business that many friends and family admonished me to reconsider my career path.  Their reasoning was simple.  There is simply no possible way that the US economy could survive and prosper under the weight of our enormous national debt.  In 1970, the year I entered the business, our national debt sat somewhere between $370 and $380 billion.  Of course, today our national debt hovers somewhere around $13 trillion and growing.

Before I go any farther, I want to clarify one important matter.  Nothing I’ve already written or am about to write is meant to trivialize our serious national debt issue.  The amount of debt that our government has piled up in the last 40-plus years is egregious and needs to be addressed.  On the other hand, a great motivating factor for authoring this article is to attempt to separate government and the economy.

From my perspective, I clearly see government as a major expense item on our economic profit and loss statement.  However, I reject the notion that the government either runs the economy or is responsible for its health.  Would it not be true, that if our government ran our economy, that we would be at best a socialistic state, or at worst a communistic state.  But in truth, we are a democracy, and our economy is one built on free enterprise and consequently is market driven.

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Disclosure:  Long CTSH, AAPL, MCD and JNJ at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed ...

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Carol W 4 weeks ago Contributor's comment

would love to know what you bought them at. cheers