Warren Buffett: Ignore Market Predictions

According to Buffett's latest shareholder letter, you should ignore most financial media.

Mar 22, 2014 at 10:00AM

Warren Buffett this month released another chapter of his investing gospel, the annual letter to Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) shareholders. He managed to make two sex jokes. However, as he does every year, he also aimed to fill his letter with wisdom to improve readers' fortunes. And one of those pieces of wisdom was to ignore others' opinions on the market.

Simply put, don't read, listen to, or otherwise ingest most financial media related to market predictions.

Specifically, Buffett wrote:

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth.")

What Buffett means is that much of financial news is fluff. This doesn't include "hard" news like profit reports, new ventures, or mergers and acquisitions, but rather those talking heads who call market tops, bottoms, and anything in between. There are a few things that back up this thinking.

It's not valuable
The analyst findings that the media reports on are rarely accurate. Analysts have a hard time predicting the future of a single company, let alone a market made up of thousands of companies. According to a study out of Notre Dame on analysts' target pricesover 12 months, "63% of the time the target price remains above the market price, and 27% of the time the target price is never met."

Analysts also have a greater incentive to forecast a positive price change. As The Wall Street Journal quoted Citigroup chief U.S. equity analyst Tobias Levkovich: 

If you're a bull and you're wrong, you're forgiven. If you're a bull and you're right, they love you. If you're a bear and you're right, you're respected. If you're a bear and you're wrong, you're fired.

With a more scientific approach, consulting company McKinsey found, "On average, analysts' forecasts have been almost 100 percent too high." And these are the analysts who have made a career in figuring out where stocks and the market are headed -- not the media that reports it or, even worse, makes a best guess.

It may not have your interests in mind
Just as investors investigate the incentives in place for a company's management, they should review the incentives of most financial media outlets. Playing up fear, uncertainty, and doubt works well to gain readers, viewers, and listeners. This helps ensure that the organization's business model can succeed. This can be especially true of advertising-based models.

On the other hand, if incentives align, financial media can be a boon.

At The Motley Fool, we writers disclose any of our potential conflicts of interest at the end of each article. The business model is also clear -- The Motley Fool offers newsletters focused on delivering market-beating stock and fund recommendations, among other products and services. The Motley Fool is motivated to select outperforming stocks in order to keep and gain members -- if it didn't, it wouldn't be a sustainable business.

What you should do
If you're wondering what to do with all the time you used to spend watching or reading the latest market predictions, just follow Buffett's example: Research companies on your own. Read through annual reports, make your own predictions, and track your thoughts to improve as an investor.

Of Berkshire Hathaway's purchases, Buffett writes, "we have never foregone an attractive purchase because of the macro or political environment, or the views of other people." For example, Berkshire's purchase of Coca-Cola (NYSE: KO) in 1988 might have seemed unreasonable, given that the stock price increased over 120% in the previous five years and had a P/E ratio above 14. By 1998, the value of Berkshire's stake in Coke had increased by more than 1,000%. How many calls of market tops were made during that time? It didn't matter to Buffett, and it shouldn't matter to you.

A Few Ideas on What to Research First
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Dan Newman owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway and Coca-Cola and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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