Here’s what Warren Buffett thinks about the idea of 'predicting how stocks will behave next week'

Serial investor and CEO of Berkshire Hathaway Warren Buffett recently released his latest letter to shareholders with interesting takeaways for everyone from shareholders, to management professionals, to students.

Speaking on predicting stock patterns for next week or year, Buffett said, "My expectation of more stock purchases is not a market call. Charlie [Munger] and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price."

Buffett said that his investments are not based on predicting market behaviour in forthcoming weeks, rather their focus is on calculating whether the intrinsic value of the business is worth more than its market value.

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This tactic deployed by Buffett is known as value investing. Under this strategy, investors seek out stock they believe are being undervalued in the market.

Investors who use this method believe that market reactions to day-to-day business operations sway the stock price, which generally is not in line with the company's long-term fundamentals. This overreaction gives the value investor an opportunity to profit buy stocks at a deflated price.

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Apart from giving an important lesson in value investing, Buffett also delved into various topics such as benefits of diversification in portfolio and investment in overpriced stock.

Making an analogy between different businesses and trees in a forest, Buffett said, "It’s not necessary to evaluate each tree individually to make a rough estimate of Berkshire’s intrinsic business value. That’s because our forest contains five “groves” of major importance, each of which can be appraised, with reasonable accuracy, in its entirety."

"A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty," he added.