The Contradictions of Warren Buffett….

Fortune is out with an excerpt of the 2014 Warren Buffett annual letter. It’s full of useful nuggets of knowledge as usual. I always tell people that the best education you’ll likely ever obtain in this business is to go back and read all of his annual letters (read them here & here).  But you also have to take some of his comments with a grain of salt because he often engages in vague generalizations.

For instance, in this letter he promotes the idea of picking individual common stocks.  But then he adds the caveat that it’s okay if you’re  a bad stock picker because you can just own the index.  But whatever you do, don’t engage in macro forecasting:

“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.”

But then, just a few paragraphs later he says:

“American business has done wonderfully over time and will continue to do so”

That’s a macro forecast.  And he uses this macro forecast to promote the idea that people can and should just buy index funds.  But what’s interesting about all of these long only index fund advocates is that none of them seem to realize that they’re engaging in a very specific macro forecast.  I call it lazy macro because long only indexing is based on the long-term forecast that “American business…will continue to do…wonderfully”.  It’s probably a pretty good bet if you ask me.  I am certainly no long-term pessimist.  But let’s be clear about how we go about formulating our processes and projections.  The sorts of contradictions in the commentary above are not helping anyone understand how to go about engaging the world of finance.  In fact, I am concerned that it’s causing a great deal of misconception.

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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