CODEXCard 5 of 6 · Letters to Shareholders, Six
Buffett on forecasting
Forecasters reveal more about themselves than the future.
Buffett on forecasting can be summed up as polite refusal. Throughout his shareholder letters he declines to predict where the stock market, currencies or the economy will go next. He has suggested that confident forecasts tell you a good deal about the person making them and very little about what will actually happen.
His reasoning starts with incentives. Pundits and money managers are often rewarded for sounding certain, and dramatic calls draw attention and clients. A person warning of a crash may be selling protection, and a person promising a boom may be selling enthusiasm. Meanwhile, the things Buffett can actually study, a company's economics, its management and its price today, offer firmer ground. He builds decisions on those and treats macro predictions as background noise.
The mistake is deciding that every forecast is useless. Some trends, like slow demographic shifts or how fast certain technologies spread, have real and measurable patterns. Good judgment is about calibration: be very skeptical of short-term market and economic calls, and give more weight to forecasts grounded in known, steady dynamics.
This idea supports Buffett's view of time in the market. If you are not relying on predictions, you can hold through the noise they create.
Example
A podcast host you follow announces each January which stocks will soar that year. You look back at three years of his picks and find they did no better than a simple index fund, but his show grew every year. You realize his real product is the confident prediction, not the results.
Try it this week
The next time a forecast nudges you toward a decision, ask what the forecaster gains if you believe them, and decide based on what you can verify now.
From Letters to Shareholders, Six (Warren Buffett · 1979).
