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“Microeconomics is what you do, macroeconomics is what you put up with”

First quick reaction to the Berkshire annual meeting

By Travis Johnson, Stock Gumshoe, April 30, 2016

That headline is a quote from Charlie Munger from today’s Annual Meeting for Berkshire Hathaway (BRK.B) here in Omaha, and it’s one of the ones that really caught my ear.

He was responding to a question about how he and Buffett avoid making big predictive calls about the economy, or assessing the near-term health of the economy based on the results of Berkshire Hathaway’s 60+ operating subsidiaries…. and, essentially, how they avoid falling prey to the psychological mistakes and hubris that hamper most of us when it comes to investing.

It might be that no executive is better prepared to predict what will happen with the US economy than Warren Buffett, but he steadfastly says that he doesn’t do that because he’s terrible at it.

And if Buffett is terrible at it, with time to do nothing but think deeply about businesses, and with monthly reports on his desk from subsidiaries that tell him exactly what’s happening with railroads, and real estate, and manufacturing, and restaurants, and a dozen other sectors of the economy… what the heck are we doing listening to anyone who predicts what the economy is going to do over the next year? And doubly, what the heck are we doing investing based on some sort of prediction about where we “feel” the economy is headed?

Microeconomics, in this case, is the study of businesses and simpler economic relationships… like what you would do if you were trying to assess whether there’s a market in your town for the Dairy Queen franchise you’re planning to open, or arguing with your kids about how much allowance they need. It’s the study of simpler economic relationships. Macroeconomics is the study of larger economic systems — in this context, macroeconomic forecasting would perhaps be predicting what US GDP will be, and where the Eurozone will end up, and what will happen with gold. Since economics inextricably involves human behavior it’s all hard to predict, but macroeconomic forecasting is nearly impossible. Even the Federal Reserve, the most connected and learned army of economists around, gets their forecasts quite substantially wrong most of the time.

That’s a lesson we would all do well to remember — stop trying to think you will ever know what’s going to happen with the economy, or with global trade changes: Think about things you can understand, and maybe understand better than some ...

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