We spend almost no time thinking about macroeconomic factors. In other words, if someone handed us a prediction from the most revered intellectual on the subject, with numbers on unemployment or interest rates or whatever for the next two years, we wouldn’t. we wouldn’t pay any attention to it. ~Warren Buffett
If you spend 13 minutes a year on the economy, you’ve wasted 10 minutes. ~Peter Lynch
I am a lifelong admirer of Buffett and to a lesser extent Lynch. But in this particular aspect, I think both are completely wrong.
Before you start trolling me and wondering who this guy is who dares to contradict two of the biggest investors in the world, listen to me 😊
Major stock market crashes occur on macroeconomic factors
swim with the tide
Investors make money when they are on the right side of a business and economic trend. Buffett and Lynch and other US-based investors over the past fifty years have done so well primarily because they had huge economic tailwinds behind them. Look at the counterfactual, you won’t hear too many big Japanese investors over the past 30 years. Why? Because Japan did not experience growth or was in a recessionary environment during this period. Same for Europe. Can you name a major European investor who only invests in Europe? You will probably have a lot of trouble. The most European names you might think of will be global investors and hold the majority of their investments in US or global companies.
The fact is that it is very difficult to swim against the tide. As a company and therefore as an investor. Good investors understand this intuitively. Arguably one of the main reasons there have been so many excellent American investors over the past fifty years is that the United States has been the greatest engine of economic growth in the world. Likewise, if you go back two centuries, you will find the richest people in the world hailing from the UK, Germany and France.
Macro is too hard to predict
The most common argument against the macro is that it is too difficult to reliably predict. I completely agree. But so is bottom-up investing. There are far too many factors influencing a business that cannot be analyzed reliably. And that’s the only reason no investor has a 100% track record. Everybody makes mistakes. And this happens because they base their decisions about the future on their understanding of the past.
Understand macro context
Understanding and accepting that the macro plays an extremely important role in investing is critically important. To say it doesn’t make sense is to downplay the understanding that you are only a small part of a much larger cycle of things.
Understanding the macro does not mean using it to predict future events. Understanding means you are aware of the lay of the land. It’s like a cricket captain who looks at the pitch and ground conditions and then decides which team will be optimal for the conditions. Different terrain, weather and ground conditions may require different team selections. This is exactly how macros should be used. Understand the underlying context of what is happening around us. Once you understand the context, you are free to position your investments accordingly and can decide to act or ignore certain events.
In summary, when you ignore the big picture and focus only on bottom-up stock picking, you are overemphasizing the importance of the business and ignoring its operating environment, which more often than not actually has a greater influence than individual firm characteristics.
(Edited by : Ajay Vaishnav)
