Warren Buffett has made a number of headlines in recent months for his optimistic take on the U.S. stock market and economy. But Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life and a senior adviser to Morgan Stanley, says that while Buffett is indeed bullish, he’s not as bullish as those headlines may seem.
“I believe Buffett’s optimism about the country is genuine,” Schroeder writes today on Bloomberg.com. “It’s a big-picture sort of optimism, though. Economists who are debating whether there will be a recovery in 2010 are living in a different world than Buffett, whose comparisons to periods as traumatic as World War II and the Civil War should sober anyone who thinks we are going to turn the economy on a dime.”
Schroeder says that Buffett has “explained his ebullient view of the economy using historical analogies instead of economic data. He has said that trying to call the bottom of the market is futile; buy into fear. The U.S. has surmounted worse troubles before, and it will survive this, too: ‘Your children and grandchildren will live better and better’ than you.” But while Buffett has shown that he is well aware of the current problems in the economy, the question is whether he is basing his comments on past experience rather than an analysis of what will happen in the future, she says.
Schroeder also notes that Buffett has “an ace in the hole: inflation. His advice for protecting against inflation is, first, to increase your earning power. That’s sort of difficult these days for most of us. Second, invest in businesses or stocks. Even if the nominal profits from a business are gouged by inflation, a good business provides some real return over time.”
One question, Schroeder says, is why Buffett is touting only U.S. stocks, given that inflation could be such a problem. She says he has always maintained that big U.S. stocks are international enough for most investors, but adds, “with him it’s also hard to separate patriotism from prudence”.
“Once you disentangle all these strands — the cautious Buffett who tends his reputation, Buffett the long-term optimist, Buffett the realist about economics, Buffett the hawk on inflation, and Buffett the domestic investor — it turns out that Buffett is bullish, but not as bullish as he sounds,” Schroeder concludes. “His optimism is long-term in nature, and inflation is his hedge. Consider yourself warned.”