Buffett: Why You Won’t Outsmart the Market

Warren Buffett takes market cycles all in stride. For the CEO of Berkshire Hathaway, "wild things happen in the markets.”

Nevertheless, he offered some simple investing ideas recently to students at the University of Pennsylvania’s Wharton School of Business.

Buffett recommends an investment strategy that factors in two things:

First, that if investors knew what was going to happen in the economy, they still wouldn’t necessarily know what was going to happen in the stock market.

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Secondly, that they can’t pick stocks that are better than average. Stocks are a good thing to own over time, said Buffett.

"There are only two things you can do wrong (with stocks): You can buy the wrong ones, and you can buy or sell them at the wrong time.”

As for the American economy, it "won’t do fine every year and every week and every month … if you don’t believe that, forget about buying stocks anyway,” said Buffett.

"But it stands to reason, we get more productive every year. It’s a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market.”

Such a sunny outlook in a shaky market could explain why Buffett isn’t unnerved by the current credit crisis and the roller coaster ride that Wall Street’s been on, and why he’s sure the U.S. financial markets aren’t losing their competitive edge.

"I think we’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don’t want a capital market that functions perfectly if you’re in my business,” Buffett told the students.

He went on: "People continue to do foolish things no matter what the regulation is, and they always will. There are significant limits to what regulation can accomplish.”

While Buffett conceded that regulating is an important part of the financial system, "the efficacy of it is really tough,” he said.

"It’s very, very hard to regulate when you get into very complex instruments where you’ve got hundreds of counterparties.

"The counterparty behavior and risk was a big part of why the Treasury and the Fed felt that they had to move in over a weekend at Bear Stearns,” said Buffett, adding that he felt they were right to do that.

Buffett had words of advice for people who are not "professional” investors — they should stay with index funds, any low-cost index fund, and they should buy it over time.

"They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong price. You just make sure you own a piece of American business, and you don’t buy all at one time,” he advised.

Buffett has seen his share of financial market crisis, and says that "every one has so many variables in it.”

When pressed to compare the current turmoil to past crises, Buffett said, "There’s no question that this time there’s extreme leveraging and in some cases the extreme prices of residential housing or buyouts.”

Buffett also isn’t convinced the government’s $150 billion stimulus plan will make an impact.

"The abuses keep coming back,” he said. "You’ve got a banking system that’s hung up with lots of that. You’ve got a mortgage industry that’s deleveraging, and it’s going to be painful.”

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