Macro Forecasting: Avoiding the Siren Song
Macroeconomic forecasting is at best a distraction to the business of investing
You don’t need a weatherman to know which way the wind blows. - Bob Dylan
You cannot afford to miss generational opportunities in the market. I did.
During the height of the financial crisis in late 2008 and early 2009, I spent too much time worrying about the macroeconomic and political implications of the banking crisis and government bailouts.
I researched parallels between current events and the decline of the Roman Empire. I bought a TIPS ETF expecting hyperinflation.
As a history major and economics minor, I thought my time had come.
It had not.
I should have dug through company filings, looking for great businesses trading on the cheap. Instead, I got caught up in the intellectual drama of the moment and missed out on some potentially life-changing investment opportunities.
Could things have turned out differently for the financial markets and the economy? Sure. If they had, would it have been worth the worry? No.
Go through a list of successful long-term investors, and they consistently de-emphasized macroeconomic forecasts in their processes.
Here are a few examples.
The amount of mental effort the financial community puts into this constant attempt to guess the economic future from a random and probably incomplete series of facts makes one wonder what might have been accomplished if only a fraction of such mental effort had been applied to something with a better chance of proving useful. - Philip Fisher
We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle. - John Maynard Keynes
Forming macro opinions or listening to the macro or market predictions of others is a waste of time. - Warren Buffett
I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes. - Peter Lynch
Our primary focus as long-term investors should be finding great businesses. If we've invested alongside capable management teams, it's better to outsource macroeconomic concerns to them. They know which economic factors matter to their companies and can adjust their strategies to face those challenges and opportunities.
Further, we have limited time, focus, and brain capacity to do everything well.
In Sir Arthur Conan Doyle's A Study in Scarlett, Dr. Watson is stunned that Sherlock Holmes is unaware of Copernican Theory and the solar system's arrangement.
Holmes replies that astronomy is not relevant to his field of study, adding:
“I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out, or at best is jumbled up with a lot of other things so that he has a difficulty in laying his hands upon it.
Now the skillful workman is very careful indeed as to what he takes into his brain-attic. He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in the most perfect order. It is a mistake to think that that little room has elastic walls and can distend to any extent.” (My emphasis)
Macroeconomics is relevant to us as investors. Taken too far, however, it can crowd out more important information and cloud decision making.
My approach is this: know enough macroeconomics to recognize the weather but avoid becoming a meteorologist.
The allure of macroeconomic forecasting, Fed watching, and tuning into the latest CPI figures is understandable. As investors, we hear other intelligent people talking about it and feel we must have our own opinions. Clients, prospects, and acquaintances may also expect us to have an opinion. If we don't, they may perceive us as not doing our job or at least not being good at it.
Macroeconomics is also of course fascinating, intellectually stimulating, and great kindling for building narratives. Avoiding the siren call is hard.
There are sharp macroeconomic and geopolitical analysts out there who are worth listening to. And some well-informed traders can do well in macro, of course, but we play a different game.
At the 2015 Berkshire Hathaway meeting, when asked about macroeconomic concerns, the late Charlie Munger, off the cuff, produced one of his many classic aphorisms:
“We're swimming all the time and let the tide take care of itself."
We can’t control the ebbs and flows of the economy. We can control our process and understand where a company is in its capital cycle. Leave the rest for others.
The more we focus on business analysis, the better prepared we’ll be when opportunities arise.
What do you think about macroeconomic forecasting for investors? Please let me know in the comments below.
Stay patient, stay focused.
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At the time of publication, Todd and/or his family owned shares of Berkshire Hathaway.
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