A year ago, I claimed that Buffett beats Bernanke.
My logic was simple: One made long-term decisions (Warren Buffett) while the other made short-term decisions (Fed Chairman Ben Bernanke). Guess which mindset's better for investors?
Unfortnately for Bernanke, not much has changed. He's still tasked with fixing our long-term problems with a short-term tool kit.
A year ago, he brokered the rescue of Bear Stearns by JPMorgan (NYSE:JPM) by juicing the terms with a government guarantee on a big chunk of Bear's subprime loans. With crisis seemingly averted, he promptly predicted an economic recovery by the second half of 2008.
Oops!
Well, we all know what happened after that. Instead of a recovery, the economy crumbled amidst a series of government takeovers (Fannie Mae, Freddie Mac, AIG), bank bailouts (Bank of America (NYSE:BAC), Citigroup (NYSE:C), et al.), faux-bank bailouts (Goldman Sachs (NYSE:GS), General Electric (NYSE:GE), etc.), and one inscrutable non-bailout (Lehman Brothers).
Supporting these government rescue efforts, Helicopter Ben has fired monetary shot after monetary shot against the specter of deflation -- running the proverbial printing press nonstop after lowering Fed lending rates to virtually zero.
We can argue another day about the prudence of these moves, but either way, the bailouts and monetary salvos are all short-term solutions. They don't fix the underlying problems of over-reliance on cheap credit, leverage, and risky derivative instruments. In fact, you'll recall that the super-low interest rates supported by the Fed after the tech bubble encouraged the cheap credit that helped get us into this mess.
A better prediction
My problem with Bernanke (and many economists) is that he makes confident-sounding yet incorrect short-term predictions on a routine basis. For example, unchastened by his terrible call last year, he's now predicting that the economy will pick up in the second half of this year. With a revised prediction every few months, he's sure to get it right at some point.
When Buffett makes predictions, they are measured in decades, not months. A case in point is his much-misunderstood selling of equity puts in major global stock indices. Basically, Buffett (through his company, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B)) is betting billions that the stock market will be in reasonable shape one to two decades from now. Even with all this doom and gloom, that doesn't sound too dubious a prediction. Yet his counterparts are betting billions against him.
Notice the difference between these two approaches: Bernanke makes short-term predictions on the state of the most complex organism on this planet -- the global economy. Many ancient Greeks would shudder at this level of hubris. This false sense of control leads to overreaction and pain. In contrast, Buffett tightly defines his circle of competence with lines like: "Let me be clear on one point: I can't predict the short-term movements of the stock market." Instead he focuses on what he can control: taking advantage of opportunities created by short-term thinkers like a certain Fed chairman.
Invest like Buffett
When the economy faces trouble, like it does now, people panic. They see the future through the lens of today's problems. They see the situation only getting worse and worse. Then they do irrational things like reallocating money that they won't need for decades from bargain-priced stocks to low-yielding Treasuries -- only to jump back into stocks at much higher prices after the market has recovered.
In your investing life, be like Buffett, not Bernanke. Don't react to daily changes in the Dow. Leave that to the "buy high/sell low" set. Instead, be patient and look out for the opportunities the short-termers throw at you. That's what Buffett does. And that's the credo our analysts at our Inside Value newsletter live by. They've identified the five stocks they believe are the best risk-adjusted buys in this market. I invite you to take a peek with a 30-day free trial. There's no obligation to subscribe.
Anand Chokkavelu prefers Buffett to Bernanke on both economic and facial-hair policy matters. He owns shares of Berkshire Hathaway and Citigroup. Berkshire Hathaway is both a Motley Fool Inside Value and a Motley Fool Stock Advisor selection. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.
