Warren Buffett's annual letter to the shareholders of Berkshire Hathaway is widely read both for its wide-ranging wisdom and as a source of new ideas. The 2006 edition, released this week, is already attracting attention and media commentary.
Since most investors are not going to read the entire letter themselves (although they should), they will rely on media reports to learn Mr. Buffett's thoughts. We predict that one aspect of the letter will be cited in a way that seriously misleads investors, the statement where he uses the term "soft landing."
Look first at the relevant paragraph in the letter, a section where Mr. Buffett is discussing U.S. trade deficits and debt problems:
I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking.
As usual, Mr. Buffett's point is strongly stated and clearly put. Trade and budget deficits are decades-old problems, and, as the statement suggests, may take decades to resolve. Unless our policy direction is changed, there will be an unpleasant ending. This is an issue that requires the use of the ballot box, particularly by young people.
Now consider the lead from a Reuters story on the letter:
Warren Buffett said on Thursday the U.S. economy may not enjoy a "soft landing" because Americans are taking on too much debt as the U.S. trade deficit worsens.
Because of the multi-year debate about the Fed tightening cycle, the "soft landing" phrase probably brings that association to mind for nearly all investors and most other readers as well. While most people are worried about what stocks will do next year -- or even next week -- that is certainly not the topic of Mr. Buffett's comment.
He is also not commenting on the Fed or the economy or current economic prospects. Consulting my autographed copy of the wonderful book of his quotations, I find (P.97) the following:
We spend essentially no time thinking about macroeconomic factors. In other words, if someone handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or interest rates or whatever it might be for the next two years, we would not pay attention to it.
The Reuters story provides the entire quotation for someone who reads it carefully, and the article is not technically incorrect. It is however, very misleading. The all-important lead sentence will be interpreted by many as a short-term prediction about the success of current Fed policy. It is nothing of the sort.
Our prediction is that there will be more egregious stories, far worse than the Reuters example. During the next few days you will hear statements like "Buffett says there will be no soft landing." These will be tossed around as fact -- the accepted conventional wisdom.
It is very similar to the manner in which Alan Greenspan's recent general comments about business cycles morphed into a forecast of imminent recession.
Most people do not do complete and careful reading. The media summaries both very important and potentially dangerous.
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Posted by: Mukundan | May 30, 2009 at 05:27 AM
Thanks for taking the time to comment, Venn. Due to my travels, I did not see televised discussions of this. I hope that the comments were clarified.
This sort of error is not something that has an instant market reaction. It heightens sensitivity on the part of some, and it has an effect if continually repeated. We shall see.
Thanks again--
Jeff
Posted by: oldprof | March 02, 2007 at 07:03 PM
This is similar to the Business media - generally conservative - misinterpreting the Greenspan "There may be a recession line."
The guest-oriented format of most business shows meant that the misinterpretation was mostly corrected.
1) How many people would trade off the Buffet letter? I mean, really....
2) The market action is similar to the market action prior to the Buffet letter's posting.
3) Any pros, smart money, that read the letter would have known what it said. ) I read the letter. I knew what he said and I’m at best "100 IQ Money.")
4) Most people know The Oracle's too bright to make short term market calls.
So I doubt this was a problem. The conservative business media is always looking to rage about something Buffet's done. Remember the AIG swaps? They've turned up the media spin on Buffet ever since he started talking down the dollar, blaming - diplomatically of course – Bush’s debt-based economic policy. (And the fact that Warren Buffet’s a liberal.)
The WSJ has berated him every time the dollar index jumped, but to their chagrin... It looks like he made money on the trade.
I mean, who would you want managing your money? The Oracle? or the Wall Street Journal Opinion page? Not to mention who would you rather have dinner with?!
Throw this in with the blame-Greenspan rubish. They can't abide by the fact that maybe, just maybe things are slowing down.
Posted by: VennData | March 02, 2007 at 03:35 PM