Politics & Policy

The Stage of Omaha

Warren Buffett: good manager, bad economist.

By Jerry Bowyer

This week Warren Buffett released his annual shareholders letter. It got a lot of attention, partly because he’s the second wealthiest man in America, but more because he’s critical of the Bush administration.

Buffett announced that he would increase his 2004 bet against the dollar in 2005 based on his belief that current deficits are the cause of the dollar’s recent declines. Buffett reported that he was largely in a defensive position in 2004. This means that while the economy was booming after Bush’s tax cuts, Buffett sat on a great big pile of cash that could have been working for his investors. In other words, he bet against the Bush boom because he didn’t believe in the president’s supply-side tax cuts.

This is not surprising: For all his reputation as an oracle of modern economics Buffett has consistently, over the years, made it very clear that he knows very little about that field of study. Historically Buffett has ignored macroeconomic considerations in his investment decisions, focusing, instead, entirely upon the individual businesses targeted for investment. This is not my opinion; this is by his own admission.

Buffett was right about the dollar but he was right for the wrong reasons. As we’ve shown in the above chart on trade deficits and dollar valuation, the two simply do not relate. The dollar is falling because dollars are worth less than they were before. Dollars are worth less than they were before because our central bank is printing too many of them. Supply-side economics explains the dollar decline perfectly.

In some ways Warren Buffet’s pronouncements on economics are similar to his pronouncements on abortion and other areas of social policy. They are just the opinion of one man. But Warren Buffett is not a highly-successful investor because of his knowledge of economics. As Burton Malkiel, the author of the classic book A Random Walk Down Wall Street, once said, Buffett is an extremely talented business manager. He doesn’t spot the big economic trends; instead he spots the best companies, buys majority shares, takes control, and streamlines them.

Buffett in fact is a great cost-cutter. In that way, he’s a wonderful practitioner of supply-side economics. But ironically he derides the supply-side policies that make his success possible.

– Jerry Bowyer is the author of The Bush Boom and an economic advisor to Independence Portfolio Partners. He can be reached through www.BowyerMedia.com.

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