Yahoo Finance Warren Buffett: Don't Waste Time Trying to Predict the Future
- By Robert Stephens, CFA
It is tempting to try and predict how a company, industry or the economy will perform in future. However, in my view, this may not represent an efficient use of your time.
Instead, focusing on a company's competitive position and its growth strategy relative to industry rivals may provide a more useful insight into its long-term prospects.
Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio) has largely avoided trying to second-guess how the stock market will perform. His focus on companies with wide economic moats and an insistence on obtaining a margin of safety may be key reasons for Berkshire's 20% annualized gains between 1965 and 2019.
Trying to predict the future
Many investors frequently try to predict the future. For instance, they may make estimates on how a company's sales and profitability will change in future through the use of complex financial models. Or, they may conduct economic forecasting to try and position their portfolios effectively to capitalize on positive or negative trends.
In my view, no investor can accurately and consistently predict the future. There are an infinite number of variables that can affect company performance, the economy and stock prices. Seeking to second-guess them, and how they will interact with one another in a fluid economic environment, may prove to be an impossible task that does not lead to an efficient allocation of your capital.
As Buffett once said, "We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."
Focusing on competitive advantages
Assessing the size of a company's economic moat may be a more efficient strategy than trying to predict the future. It may provide you with guidance on the strength of a company's market position that could have a major impact on its future financial prospects.
In addition, understanding the longevity of a company's competitive advantage may be very relevant to its long-term outlook. For instance, a company that enjoys a large amount of customer loyalty due to its strong brands may be able to consistently outperform rival businesses over the long run. Likewise, a firm with a unique product or service may find it easier to generate consistently higher margins that translate into a higher return on investment for shareholders.
Buffett has always sought to identify companies with wide economic moats. As he once said, "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."
Demanding a wide margin of safety
Assessing the size of a company's competitive advantage is not an exact science. All investors sometimes make mistakes when determining how durable a company's economic moat will be.
Therefore, obtaining a margin of safety when buying a stock may lead to a more efficient capital allocation. A margin of safety acknowledges that the future is uncertain. It also takes into account that exceptional circumstances can occur to fundamentally alter the outlook for even the best businesses with the largest competitive advantages.
As Buffett previously said, "On the margin of safety, which means, don't try and drive a 9,800-pound truck over a bridge that says, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds."
Disclosure: The author has no position in any stocks mentioned.
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This article first appeared on GuruFocus.
