Learning from Warren Buffett: Stock Markets and Navigating the Macro Landscape

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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

Think back to all the stock market crashes you’ve witnessed or heard about. Covid crash, 2008 US housing crash, Dotcom crash, Harshad Mehta crash. All were the results of a macro event. You may have done a lot of detailed fundamental research on a company and invested. But one fine morning, the company or the market situation changes completely. Due to external factors completely beyond the company’s control, its revenue may be seriously affected. Buffett, for example, held positions in the “Big 4” – American, Delta, Southwest, United before Covid. He held nearly 10% of the capital of each. His logic was that fuel prices were on a secular downward trend and airlines had become like railroads. So much so that Buffett was even considering buying an entire airline.
Then the Covid crisis arrived. Macro event. Nothing to do with airline business. No basic industry or company research could have predicted the unprecedented contraction in profits. Buffett sold all of his shares. He may have panicked at the wrong time, but that’s another story.

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.

— The author, Abhishek Basumallick, is a full-time investor and writes on intelsense.in. The opinions expressed in the article are personal

(Edited by : Ajay Vaishnav)

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