What Does Buffett Know about the Economy?

Berkshire Hathaway had its annual meeting this weekend so Warren Buffett has been all over the media and CNBC answering questions.

What does Warren know about the general economy? CNBC has been asking him questions about the rate cuts, whether or not the stimulus will work, if the Fed is done cutting rates, whether or not Bear Stearns should be bailed out etc.

What does Buffett know about these issues? He is NOT an economist. Yes, he runs a company that has a lot of different divisions, such as Sees Candy and Dairy Queen, that would give him insight into what the consumer is thinking.

But that doesn’t mean he “knows” what is going to happen. He’s just guessing- like the rest of us.

What does he know about the stimulus? He has no idea whether or not the average Joe or Jane will be spending it or putting it to their credit card debt. (My take: they spend it.)

Buffett has said in the past that he doesn’t believe in market timing. So why is he answering these questions then? How does Buffett know if the Fed is done cutting rates? He doesn’t.

What Buffett knows is valuing and investing in companies. The questions about whether Bear Stearns should have been bailed out are justified. Buffett himself was involved in bailing out Morgan Stanley less than 20 years ago. From the LA Times:

He said the Federal Reserve’s bailout of Bear Stearns Cos. probably prevented a crisis among investment banks because Bear Stearns held a large number of derivative contracts with other investment banks. If Bear Stearns went bankrupt, all those derivatives would have to be valued at zero or unloaded quickly.

But he and Munger agreed that not every business or investment bank should be rescued, because failure is an important part of capitalism.

“Capitalism without failure is like Christianity without h*ll,” Buffett said.

ha! ha!

Now THAT is what we like about Buffett. He gets straight to the point.

Let’s quit asking him general economic questions. Let’s ask him about what he knows best and that’s valuing companies.

The current financial crisis is a byproduct of a system that encouraged executives to “paint pretty pictures,” Buffett said.

Munger said lots of financial institutions acted with stupidity and overreached to improve earnings in recent years. “I think you have to start with the idea that a lot of the current troubles are richly deserved,” Munger said.

The complexity of the tactics that financial institutions often employ makes it difficult to determine what those companies are worth — even for Buffett.

“There are some financial institutions I can’t value,” Buffett said.

Listen to Buffett about the financial companies. Even HE can’t value them. Neither can you.

Do as he does.