How Warren Buffett would handle today's market

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(MoneyWatch) Yesterday, we looked at some of the good news happening in our economy in light of the stock market plunge and interest rate spike we've recently experienced. But my interactions with members of the media about the markets' behavior got me thinking about another important lesson for times like these.

As is almost always the case, I receive calls from members of the financial media asking me to comment on the market after it suffers a large loss. Specifically, they look to me for advice as to what investors should do. My answer is always the same: As hard as it may be to do so, smart investors know that the key to success is ignoring the daily noise of the markets.

What's going to happen tomorrow isn't only unknowable, but is also irrelevant, unless you need your money first thing in the morning. If you think you'll need your assets on short notice, don't invest any of it in stocks. There's just too much risk that over such short periods that the real value of your investment will decline, leaving you with fewer assets.

When I relate this wisdom, I'm told, "But so-and-so is predicting blah, blah, blah." My response never varies: While that person may be highly intelligent and offer what seems to be a logical explanation for his forecast, it's important that you ignore all such forecasts, because he hasn't a clue about where the market is going. And if he thinks otherwise, he's either a legend in his own mind or a great actor. The evidence from academic studies demonstrates that there simply are no good forecasters. And that holds true not only for stock market forecasters and economists, but for scientists, politicians and even intelligence agencies!

As I take pains to point out to members of the Fourth Estate, it's truly a great tragedy that investors idolize Warren Buffett while ignoring his advice on forecasts. The following, from my book, "Think, Act, and Invest Like Warren Buffett," are two of the Oracle of Omaha's thoughts on the value of forecasts:

  • "We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."
  • "A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting."

What I've learned is that we're no closer to being able to predict what the market will do, despite all the innovations in information technology and decades of academic research. The next time you're tempted to act on some guru's latest forecast, ask yourself the following questions:

  • Is Warren Buffett acting on this expert's opinion?
  • If he isn't, should I be doing so?
  • What do I know about the value of this forecast that Buffett (and the market in general) doesn't?

Another way to look at it is to consider how you've responded to previous forecasts. In his book "The Behavior Gap," my colleague Carl Richards recommends asking three questions before you act on someone's advice or prediction:

  • If I make this change and I am right, what impact will it have on my life?
  • What impact will it have if I am wrong?
  • Have I been wrong before?

Asking and honestly answering these questions should result in your investing more like Warren Buffett and less like the majority of investors, who engage in behavior that is destructive to their portfolios.

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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