The Federal Reserve raised interest rates again this week, ending speculation about what its response would be to continued inflation and a slowing economy -- for now. On the one hand, inflation is still high, although the rates of growth are decelerating. On the other hand, the economy is showing signs of slowing down.
Raising interest rates helps put a halt to inflation, but if they slow things down too much, it could lead to a recession. Many economic experts are now forecasting a recession at some point during the year. What does investing legend Warren Buffett think, and how should that affect your investment decisions?
This is what Warren Buffett thinks of expert forecasts
Buffett isn't a fan of expert near-term forecasts. In fact, he calls them "worse than useless." That's pretty strong language, especially for an industry that keeps many other investors on their toes at all times.
If you understand how Buffett views investing, though, it makes total sense. "Our job is to manage Berkshire's operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company's unmatched staying power when financial panics or severe worldwide recessions occur," he says. The glaring point he's making is that recessions do occur, as do all sorts of economic situations over a long period of time. It's part and parcel of how modern economies and markets work. Successful investing involves knowing this from the outset and crafting a strategy that generates wealth over time while taking into account the inevitable bumps along the way.
It's easy to see why he thinks near-term forecasts are useless since, as a long-term investor, you're already strategized for things that might or will happen. Why are they worse than useless? I would venture that they distract the investor from the long-term strategizing required for successful investing, which could make them harmful.
This is what Buffett thinks about the long-term prospects of the market
While Buffett used the phrase "worse than useless" to describe "near-term economic and market forecasts," over the long term he's also very clear on what he thinks. Buffett is a big believer in the power and creativity of the American people. And that's why he believes in the long-term success of the market regardless of the bumps along the way. In fact, he calls it "the American tailwind."
"I have yet to see a time when it made sense to make a long-term bet against America," he says. "And I doubt very much that any reader of this letter will have a different experience in the future."
To that end, he stresses that he is not a stock picker but a business picker; he believes that when you invest in great companies, the short-term projections don't matter for the long haul.
Does Buffett think a recession is coming?
Buffett claims ignorance here, but he does state that recessions do happen. That's it. He recommends that for most investors, it makes the most sense to invest in an index fund and move on with your life, and Berkshire Hathaway owns index funds as part of its portfolio.
Part of setting up your investments with the inevitable recessions and other economic impacts in mind, however, is taking advantage of short-term market conditions to further your long-term goals. That's why even though he has said his favorite holding period is "forever," he sells stocks when he or his money managers determine a better use of funds.
The annual Berkshire Hathaway shareholders meeting is this weekend, and investors can look forward to hearing more pearls of wisdom from Buffett and his investing partner, Charlie Munger.
