2016: How does Buffett weight macro and micro economic information?
AUDIENCE MEMBER: Hello. Hello, Mr. Buffett and Mr. Munger, thank you so much for your insights, teaching, and being great role models. My name is Eric Silberger, a violinist based in New York City.
My question for both of you is related to psychological biases. Through Berkshire Hathaway’s operations, you get a very good read on macroeconomic factors. Yet, Berkshire does not make investment decisions based upon macroeconomic factors.
How do you control the effect of information, such as knowing macroeconomic factors, or the anchoring effect of knowing stock prices, because after a while it’s hard not to once you’ve analyzed them before?
And how does that influence your rational decision making, whether you should ignore it, or whether you should try to use it in a positive way?
WARREN BUFFETT: Charlie and I are certainly — we read a lot, so we — and we’re interested in economic matters, and political matters, for that matter. And so we — we know a lot, or are familiar a lot, I should say, with almost all the macroeconomic factors.
That doesn’t mean we know where they’re going to lead. We don’t know where zero interest rates are going to lead. But we do know what’s going on, if we don’t know what — what is likely to —
CHARLIE MUNGER: Warren, there’s a confusion here.
WARREN BUFFETT: Oh.
CHARLIE MUNGER: It says microeconomic factors.
WARREN BUFFETT: Oh, micro.
CHARLIE MUNGER: We pay a lot of attention to those.
WARREN BUFFETT: Oh, yeah. I’m sorry.
CHARLIE MUNGER: If you talk about macro, we don’t know any more than anybody else.
WARREN BUFFETT: He summed it up.
In terms of the businesses we buy, and we — when we buy stocks, we look at it as buying businesses, so they’re very similar decisions — we try to know all, or as many as we can know, of the microeconomic factors.
We — I like looking at the details of a business whether we buy it or not. I mean, I just find it interesting to study the species, and — and that’s the way you do study it. So I — I don’t think there’s any lack of interest in those factors or denying the importance of them. So am I getting his question or not, Charlie?
CHARLIE MUNGER: Well, there hardly could be anything more important than the microeconomics. That is business. Business and microeconomics is sort of the same term.
AUDIENCE MEMBER: I guess —
CHARLIE MUNGER: Microeconomics is what we do, and macroeconomics is what we put up with.
AUDIENCE MEMBER: The anchoring effect, I mean, how do you deal with that as well?
CHARLIE MUNGER: Well, we’re not anchored to what we’re ignoring.
AUDIENCE MEMBER: I see. (Laughter)
WARREN BUFFETT: But we — Charlie and I are the kind that literally find it interesting in every business — we like to look at micro factors.
If we buy — when we buy a See’s Candy in 1972, you know, there may have been 140 shops or something. We’ll look at the — we’ll look at numbers on each one, and we’ll watch them over time, and we’ll see how third-year shops behave in the second year — we really like understanding businesses.
It’s just — it’s interesting to us. And some of the information is very useful, and some of it may look like it’s not helpful, but who knows when some little fact stored in the back of your mind pops up and really does make a difference.
So, we’re fortunate in that we’re doing what we love doing. I mean, we love doing this like other people like watching baseball games, and which I like to do, too.
But they — just the very act, every pitch is interesting, and every movement, you know, and whether the guy’s — you know, a double steal is interesting, or whatever it may be, and so that’s what our activity is really devoted to, and we talk about that sort of thing.
CHARLIE MUNGER: We try and avoid the worst anchoring effect, which is always your previous conclusion. We really try and destroy our previous ideas.
WARREN BUFFETT: Charlie says that if you disagree with somebody, you want to be able to state their case better than they can.
CHARLIE MUNGER: Absolutely.
WARREN BUFFETT: And at that point, you’ve earned the right to disagree with them.
CHARLIE MUNGER: Otherwise, you should just keep quiet. It would do wonders for our politics if everybody followed my system. (Laughter and applause)