The great investing myth (3): Know macro investing + Predict the future 🔮

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Every day, there are events driving the financial markets. On mainstream financial commentaries such as CNBC, Bloomberg or the local financial channels, there are many experts (economists, fund managers, medical experts, and political observers) being invited to fill the airtime 24*7 to analyse the twists and turns of events affecting the financial markets and predict the macro directions.

Likewise, many, among our friends and on social media, also talk about various macro factors affecting financial markets (inflation, employment, interest rates, forex, unemployment rates, GDP growth as well as global issues like trade wars, Russia-Ukraine invasion, sanctions, Covid-19) and its impact on various investments.

It gives an impression that this is the way to invest; an acute awareness of global situations and events and a good understanding of macroeconomics. Depending on the newsflow, certain equities and other asset classes (bonds, commodities, cryptos) can rally and correct very quickly. Profits seem quick and easy being the prognosticator.

Being the prognosticator 🔮

There are several considerations for investing and trading based on events and situations:

  1. We try to understand each event and situation, its unfolding and its contagion effects. Some try to anticipate their effects and trade the relevant stocks/financial instruments early that will benefit from the situation. Others try to look further to the horizon at lurking issues and the nth order of possible impacts.
  2. There can be more than one issue/event at play. These issues interact with each other to affect countries, industries and companies in different ways and magnitude. It is complicated to analyse the net result in the short term and over time. New unrelated events may emerge. Governments may intervene. These complicate the analysis of the situation.

    Sometimes, they are right in their predictions of the directions but the factors influencing the directions, in reality, are quite different from their original thesis.
  3. The financial market is sentiment-driven in the short term. It anticipates, front-runs the situation and sells on the news. At other times, it reacts based on the news feed. This creates wild swings (volatility) as the market reacts to every twist and turn of the news feed of the situation. This volatility in financial markets may not be reflective of the actual business operating environment of some sectors and companies. We are also unsure how much of the expectations have been factored into the prices already.
  4. In the longer term, financial markets are forward-looking indicators, which means prices will likely bottom and turn higher before the masses gain enough conviction to pile in and before the actual situation actually bottoms.

This is a lot to know for retail investors. They must be able to know what to buy/sell, and the directional bets (long/short) to profit from each evolving situation by timing entries and exits well.

The economy does not unfold mechanically in a pre-determined direction. Economics is driven by decisions made by different people reacting, anticipating and changing the situation in their own ways between the business and finance worlds. While we may know the possible trends and issues, it is difficult to time the market with the right assets and predicts with high accuracy what will happen exactly in the longer term.

The problem is waiting until the water clears, the water never clears.

And so the default assumption that I urge all investors to do is consistently put money into the market. It’s really, really simple.

Jim O’Shaughnessy

The world and its economy will always have problems; it is often a question of more or fewer problems and how these hinder growth. The water is never clear.

Also, everyone is different; our character and ideology can influence our outlook bias.

Forecasts usually tell us more of the forecaster than of the future.

Warren Buffett

Optimists, pessimists and realists

Some people can be optimists or pessimists about the future. The extent of their outlook acts as an inherent bias and influences how we view the future and consume and process information.

Foxes and hedgehogs
In his book Superforecasting, Tetlock divides decision-makers into Foxes and Hedgehogs. The concept comes from The Greek poet Archilochus who wrote, “the fox knows many things, but the hedgehog knows one big thing.” Foxes have different strategies for different problems. They are comfortable with nuance, they can live with contradictions. Hedgehogs, on the other hand, focus on the big picture. They reduce every problem to one organizing principle.

Macro investing

Macro investing is an outside-in approach where it relies mainly on our understanding of the situations and the newsflow to predict the future, find the right investments, take the right directional bets, and time the market (entries and exits) well.

Professional traders are supported by analysts, economists, and experts around the clock who trade based on macro investing. To have an edge on the market, we have to be comfortable with volatility and the various market situations (economics, geopolitics, public health, etc), and able to make quick and good decisions with limited information. The discipline to cut losses and risk management is very important as we can be wrong.

In the short run, the market is a voting machine but in the long run it is a weighing machine.

Ben Graham

Yes, it can be short-term trading dealing with a sentiment-driven market. The market may overreact. It sells on the news and it may pump and dump. The ability to stay calm, adaptable, and follow the game plan amidst the volatile market is very important.

Many rely on indices, commodities futures, forex, and technical analysis to read the situation and analyze price trends and patterns to spot market opportunities more accurately.

Yes, it does look smart being a prognosticator with the ability to read the tea leaves, know the future and make a quick and good profit. It may not suit many of us as retail investors in terms of the approach, our knowledge and experience, our ability to deal with ambiguity, volatility, and our lifestyle.

There is more than one type of market edge. We have to find our individual market edge where we are comfortable with and suitable to our lifestyle and yet can make a consistent profit over the long term. Start from a position of strength and personal preference and improve thereon.

Oaktree Capital Management with an AUM of USD 164b in 2022 has one of its six investment philosophies to be: Macro-forecasting not critical to investing. It elaborates on its website:

We believe consistently excellent performance can only be achieved through superior knowledge of companies and their securities, not through attempts at predicting what is in store for the economy, interest rates or the securities markets. Therefore, our investment process is entirely bottom-up, based on proprietary, company-specific research. We use overall portfolio structuring as a defensive tool to help us avoid dangerous concentration, rather than as an aggressive weapon expected to enable us to hold more of the things that do best.

A good post by Howard Marks: The Illusion of Knowledge

Here are some other approaches such as:

1. Bottom-up investing: Focus on the business

A long-term, more zoom-out bottom-up approach is the opposite of macro investing. While macro investing may generalize a general market trend, bottom-up investing goes deep to find gems out of the pack.

If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.

Abraham Maslow

Macro investing is analogous to using a hammer where the larger the hammer, the more things underneath appear like nails. Bottom-up investing is analogous to a magnifier where we search and find gems among the heap of nails. These investors look for companies that continue to do well with their revenue growth and profitability.

While the share prices may fall as a whole, not all companies suffer gloom and doom to the same extent. We underestimate the tenacity, resilience, and creativity of some companies and people to change to adapt, survive and thrive in challenging times; people pivot.

“Bad companies are destroyed by crisis, Good companies survive them, Great companies are improved by them”

Andy Grove

There are some sectors or subsectors that thrive as they become in demand due to changing conditions.

They focus on factors that affect the value of the company (see the exhibit below). With macros affecting the broader market, share prices can go out of sync as they swing to the extremes creating opportunities to buy low.

Dreams and Delusions: Valuing and Pricing Young Businesses

Also, almost universally, we tend to overestimate what can happen in the short term and underestimate what can happen in the long term. In many instances, many quality companies (as opposed to cyclical companies and industries) may thrive in various market situations.

The real fortunes in this country have been made by people who have been right about the business they invested in, and not right about the timing of the stock market.

Warren Buffett

Many successful value investors (Warren Buffett, Charlie Munger, Guy Spier, Mohnish Pabrai) are more focused on the long term than the daily market situations. Warren Buffett is one of them. To quote Buffett again, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Take the financial statements and price charts of high-quality companies such as Amazon, Nike, McDonald’s, and Procter & Gamble and zoom out, they have been able to ride out every challenge to deliver huge multi-baggers.

Which is easier to make money: To predict the future accurately versus finding great companies and buying them with a good margin of safety?

Instead of predicting the future ourselves, find great companies, let them figure out the future, and ride it up!

Here is one case study:  A case study of a mega-compounder: Amazon

Here is a good reminder of Amazon’s Annual Letter to Shareholders for the year 2000 when its share price dropped 80% that investors should focus on what the companies are working on and achieving than focusing on the plunging stock market. This too shall pass.

Extract of Amazon’s Annual Letter to Shareholders for the year 2000

2. Technical analysis: Summarizing newsflow and market sentiment with price action and charts

Price charts are a visual representation of the ideas, emotions, and positioning of millions of
traders and investors across multiple time horizons. In a short period, they tell us a lot
about the dominating view of market participants in a given time frame. Many use technical analysis as their source of truth where all macro and companies’ news, greed and fear sentiments are all reflected in the price and volume of the charts and it can be a valuable indicator of future price movements.

Technical analysts use a mix of indicators such as price trends, trading volume, oscillators (Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), moving averages, and support and resistance levels.

Technical analysis is usually used for trading. For investing, it helps to identify inflexion points (entries and exits) used together with fundamental and macro analysis. Technical analysis can be switched to different time frames to suit our time horizons for trading and investing.

Check out other related posts:
Multi-baggers with high-growth companies 
Nothing But Net by Mark Mahaney