By: Chuck Carnevale, F.A.S.T. Graphs, Inc.
There’s certainly no shortage of pundits, prognosticators and even self-proclaimed prophets ready and willing to bombard us with dire forecasts about our future. We get a day in the market like Monday, August 8, 2011, and “Chicken Little” shows up everywhere to include radio, television, newspapers, magazines and the Internet. Yet somehow, we survive it all. But no matter how often our so-called experts get it wrong, they remain steadfast in their desire to forecast our doom with their gloom.
It’s been more than 40 years ago when I first entered the investment business that many friends and family admonished me to reconsider my career path. Their reasoning was simple. There is simply no possible way that the US economy could survive and prosper under the weight of our enormous national debt. In 1970, the year I entered the business, our national debt sat somewhere between $370 and $380 billion. Of course, today our national debt hovers somewhere around $13 trillion and growing.
Before I go any farther, I want to clarify one important matter. Nothing I’ve already written or am about to write is meant to trivialize our serious national debt issue. The amount of debt that our government has piled up in the last 40-plus years is egregious, and needs to be addressed. On the other hand, a great motivating factor for authoring this article is to attempt to separate government and the economy. From my perspective, I clearly see government as a major expense item on our economic profit and loss statement. However, I reject the notion that the government either runs the economy or is responsible for its health. Would it not be true, that if our government ran our economy, that we would be at best a socialistic state, or at worst a communistic state. But in truth, we are a democracy, and our economy is one built on free enterprise and consequently is market driven.
Therefore, our free-market based economy is run and driven by the economic forces of supply and demand. On this basis what matters most is the attitude of the businesses, consumers and other important components of our economic decision-making processes. In other words, how we feel about our economy has a great deal to do with how we behave, which has a large impact on our economic growth and health. In other words, if we all believe our economy is weak it can easily turn into a self-fulfilling prophecy. On the other hand, when our confidence is high our economy tends to be healthier.
Therefore, it’s really important to understand what drives our economy and what doesn’t. I believe that the overall level of productivity is a major contributing factor to the continuation of economic growth. Essential in this regard would be the primary factors of production, which are land labor and capital. Additional important factors would include research and development and other paths to innovation that promise to increase productivity. But most importantly, government is not a factor of production, as previously stated – it’s an expense.
Warren Buffett’s Sage Advice in 1994
In the Berkshire Hathaway 1994 annual report, Warren Buffett wrote something that had a major impact on me at the time, and it has continued to contribute to my general thinking about investing to this day. Consequently, I consider it one of my favorite Warren Buffett quotes, as well as one of the most important lessons he ever offered the general investing public. I’m going to present the entire quote in this article; however, I am going to break it down into shorter snippets in order to elaborate its important message. But before I do that, I offer this lament: How can people ignore the following aphorism to the point of not even considering its important lesson?
The first sentence of this important Warren Buffett quote establishes its message: “We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen.” With his first sentence Warren Buffett is telling us that he considers politics and economic forecasts an expensive distraction. In other words, he is in effect imploring us, as will become more evident later, to focus precisely on what we own, rather than generalities that may or may not impact us in the long run.
The point I am attempting to make here is a simple one. Routinely, I talk to many people that can tell me in precise detail not only what the politicians in the United States are arguing about, but also what’s going on in politics in other nations all over the world. They get this information from the daily bombarding of negative and scary headlines offered by the mass media. Yet ironically, if I asked them questions about their precise holdings they cannot answer them. For example if I asked them whether the companies they own had a good quarterly earnings report, or how many of their companies raised their dividends or announced stock buybacks et cetera, they usually have no clue.
In other words, I believe investors obsess about things that although scary, do not have a direct long-term impact on their specific portfolios, but only their short-term attitudes about them. The next line in the Warren Buffett quote speaks to my point: “Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.” What these important words tell us is that with investing, there is always something to worry about, keep in mind these words were written in 1994.
However, perhaps the most important lesson that this, my favorite Warren Buffett quote can teach us, is found in the next phrase as follows: “But surprise-none of these blockbuster events may even the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices.” Here Mr. Buffett is telling us that the prospects and rewards of owning good businesses are often independent of the general political and economic environment we find ourselves in. He is also speaking to the importance of investing in good businesses at sound valuations. Finally, we believe he is telling us that it’s more important for us to focus precisely on what we own, because this is where our true long-term rewards or losses will come from.
The final three sentences in this profound Warren Buffett advice are most relevant to the purpose of this article :“Imagine the cost to us, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.” Once again, I believe Mr. Buffett is advising us to focus on our precise holdings and their unique fundamental strengths, and worry less about what’s going on