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A Q1 Letter to Send Clients
Warren Buffett on Investing in a Climate of Fear
By Dan Richards *
April 6, 2010

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Causes for concern … and for optimism

Even with the stabilization of the global economy, there’s no shortage of short-term causes of concern:

… continued questions on the direction and timing of the economic recovery in the United States and Europe and the timing of higher interest rates

… US housing prices that are staying stubbornly low and unemployment levels in North America and Europe that are stubbornly high.

… and in late March the deputy director of the International Monetary Fund made headlines as he talked about the need for advanced economies to cut spending in order to reduce deficits. 

Here’s a New York Times article about the IMF’s views.

The good news is that there are offsetting positives, even if the media headlines that feature them aren’t quite as prominent:

… on Monday March 22, the Wall Street Journal ran a story about dividend hikes as a result of rising profits by US companies. The article also mentioned that cash on hand on US corporate balance sheets was at the highest level since 2007.

… the same day the Financial Times ran a similar story about dividend increases in Europe

… and there’s growing attention to the impact that Germany’s emphasis on manufacturing productivity had in sheltering it from the worst of the economic downturn – and questions about whether  this might be a model for other countries. In March the Economist ran a 14 page feature on how Germany positioned itself for success.

Forecasting the future

Whether you choose to focus on the positives or the negatives, there’s broad agreement that the steps taken by governments stabilized the financial crisis that we were facing a year ago – and there is almost no talk today of a global depression.

So the issue is not whether the economy will recover, but when and at what rate – and whether there might be another stumble along the way.

If you look for investing advice in the newspaper or on television, the discussion tends to revolve around what stocks will do well in the immediate period ahead … this week, this month, this quarter.

We refuse to participate in that speculation – when it comes to short-term predictions, whether about the economy or the stock market, there’s one thing we can say with virtual certainty: Most of them will be wrong.  Quite simply, no one has a consistent track record of successfully forecasting short-term movements in the economy and markets.

Which is why in uncertain times such as today, one of the people I look to for guidance is Warren Buffett.

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