Buffett and Market Forecasting

I enjoy the Reese’s Peanut Butter Eggs.  They are on sale during Easter as are other shapes on different holidays (christmas trees, etc).  Fortunately, I don’t care if I eat them before or after Easter, so I know I can always get a discount the day after Easter.  On the Monday after Easter this past holiday, the eggs were 2 for $1.  This is a good deal, considering they were $1.29 for one egg before the Easter holiday.  But this isn’t my first rodeo, I knew they would get cheaper.  The next day, the eggs were 3 for $1.  Great deal, but I thought I could hold out one more day for the elusive 4 for $1.  Unfortunately, the next day, they were all gone.  Bargain hunting is a timing game, you always risk not buying at the exact bottom.  However, if you wait for that last discount you may miss the deal entirely.

This experience reminded me of Buffett’s letter from 1966.  The entire letter is circulating on the web, and is worth a read.  Here is the relevant part.

Market Forecasting:

Ground Rule No. 6 (from our November packet) says: 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. 

We don’t buy and sell stocks based upon what other people think the stock market is going to do (I never have an opinion) but rather upon what we think the company is going to do. 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…

I resurrect this “market-guessing” section only because after the Dow declined from 995 at the peak in February to about 865 in May, I received a few calls from partners suggesting that they thought stocks were going a lot lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 in May, why didn’t they let me in on it then; and, (2) if they didn’t know what was going to happen during the ensuing three months back in February, how do they know in May? There is also a voice or two after any hundred point or so decline suggesting we sell and wait until the future is clearer.  Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obviously you or, for that matter, the next few hours),’ and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn’t look so clear in retrospect.

I have been circling one particular investment as a potential large position for the past two weeks (and even owned it shortly earlier in the year).  However, the sentiment being so horrible with this company, I figured I could easily hold out for the elusive 4 for $1 deal in the coming weeks.  Unfortunately, sentiment changes very quickly in the market and is almost impossible to predict.  I should have settled for the 3 for $1 deal, but luckily I still think the 2 for $1 deal is a good bargain.  I hope to write about this investment in the coming days/weeks.

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