Earlier this month a bunch of so-called experts were predicting that the rate of inflation in the US had already peaked. They reckoned that the cost of living would continue to fall from a high of 8.5% in March to 8.3% or less in May, having already dropped to 8.3% in April.
Both the stock and bond markets reacted positively to their forecast. Shares climbed, and so too did the price of fixed income. Unfortunately for those who had listened to the experts, they could not have been more wrong.
Instead of peak inflation, the cost of living in the US accelerated to 8.6%, which is the highest since December 1981. Energy prices jumped 34.6%, which is the fastest rate of increase since 2005. Fuel oil more than doubled, electricity climbed 12%, and natural gas rose by a third.
One saving grace – if there even is a crumb of comfort – was that core inflation, which excludes volatile items, slowed for a second month to 6%.
Undoubtedly more experts will come forth with more predictions about the direction of the global economy. But did you know that Warren Buffett has never made an investment decision based on an economic prediction? He once said that any company that has an economist on its payroll has one employee too many.
Buffett prefers to focus on business predictions. He wants to know what individual businesses will be able to achieve over time. He said that he has never bought a business because the economy would do well in the next year or two. He has also never rejected an investment because the world was in the middle of a panic.
In his view, there are too many variables in economics. The harsh reality, according to Buffett, is that we have got to expect good years, bad years, in-between years, and maybe even a disastrous year in business.
And that is what investing is all about, namely, putting our money into businesses that could collectively deliver steams of rising income over time. Over the long term, good businesses should be able to ride out any economic conditions. And that is the definition of a good business.
Our job as investors is to identify those good companies. The stock price merely tells us how much we need to pay to get our hands on a share of the company’s stream of cash.
If we think that an asking price is fair, then we should not hesitate to buy. As to whether it could become “fairer”, then that is wandering into the realms of fortune telling, which is about as reliable as economists with their forecasting.
And as far as recession is concerned, if we haven’t figured out that it will happen sometime, then we will never do well in the markets.