As value/contrarian investors, we have little interest in accepting the market’s wisdom. Some might say that we have little ability to accept the market’s wisdom, which is probably what distinguishes us from other investors (and academics) that accept such guidance, advises Bruce Kaser, editor of Cabot Value Investor.
We’ll quote Warren Buffett, founder and head of Berkshire Hathaway, who wrote in his 1987 letter to shareholders, “Mr. Market is there to serve you, not to guide you.” By this, he means that the stock market’s inability to make accurate predictions should help investors make money. And that these predictions shouldn’t provide guidance on how to invest, given that they are so often wrong.
We recently came across a chart in the Wall Street Journal that illustrated the market’s inability to make accurate predictions. The chart graphs the consensus forecast for the Fed Funds rate for a fixed date, December 2024.
In January 2022, the market believed (and backed with an immense amount of capital) that the December 2024 Fed Funds rate would be about 1.25%. Pundits fully supported this guess as a fait accompli, even as inflation was running close to an 8% pace. To us, at that time, this seemed like an impossible pairing of high inflation and free money.
Fast-forward to today. The market’s current forecast for the Fed Funds rate at the end of 2024 is nearly 4.00%. That’s a long way away from 1.25%.
Forecasts for a recession seem similarly of little value. We’ve been waiting for the heavily forecast “imminent” and “deep” recession to arrive for nearly two years now. Rick Rieder, Blackrock’s chief investment officer of global fixed income, implies that the US may never again experience a recession, except from a “massive shock to the system.”
Rieder may be right, or he may be succumbing to the time-worn error of believing that the business cycle has been repealed. Quoting Buffett again, “We have long felt that the only value of…forecasters is to make fortune-tellers look good.”
Our view is that we want to be macro-aware, but not macro-driven. We have to accept the investing world as it is and may well become, and we want to be well-informed about the wide range of possibilities. But, we invest based on company-specific fundamentals and share valuations. If there is any wisdom in our approach, that is it.