Why You Shouldn't Overly Trust Macroeconomics in Investing

Many investors enjoy analyzing macroeconomics, national policies, economic trends, and global economic trajectories to determine their investment decisions.

 

On the surface, it seems logical. After all, the main assets we typically invest in, whether stocks, bonds, or real estate, cannot avoid being influenced by macroeconomic conditions.

 

However, upon closer examination and reflection, several issues arise with this approach.

 

Limited Practicality of Macroeconomics in Investment Decisions

 

Macroeconomics encompasses the broader economic conditions of a country or region, encompassing indicators such as Gross Domestic Product (GDP), inflation rate, and unemployment rate. While macroeconomic analysis is crucial for stock market investors, can it accurately predict market trends?

 

Peter Lynch famously remarked, "Devoting more than five minutes a year to macroeconomic forecasts for investors is futile. Ten minutes is simply a squander." He believed that stock market investing does not require excessive reliance on macroeconomic analysis. Instead, it should focus on the fundamentals of individual companies, emphasizing their profitability and growth potential for long-term holding.

 

Lynch believed that the fundamental reasons for stock market rallies are the profitability growth of companies and market sentiment, rather than the growth of economic indicators. He suggested that investors should focus on factors such as a company's profitability, industry and company prospects, and the market's reaction to these factors. When the market has low expectations for a particular industry or company, it may underestimate their potential, creating investment opportunities.

 

He contended that the stock market does not mirror macroeconomics but rather reflects people's expectations. Market fluctuations are more based on psychological expectations than changes in macroeconomics. This perspective partly illustrates the limitations of macroeconomic analysis.

 

Even Esteemed Economists Do Not Unconditionally Rely on Macroeconomics

 

Keynes, the founder of macroeconomics, was also a successful practical investor. Yet, even he couldn't profit solely by predicting macroeconomic cycles.

 

In the 1920s, Keynes' macroeconomic theories were relatively mature, so he often relied on his theories for investment operations. However, over this period, Keynes incurred losses far exceeding his gains. According to statistics, from 1922 to 1929, Keynes' investment returns were lower than the market index in five out of seven years, resulting in dismal performance.

 

In the 1930s, Keynes changed his investment philosophy. As a macroeconomist, he stopped predicting economic trends and instead searched for undervalued stocks, buying them in large quantities for long-term holding, becoming a thorough value investor. This investment approach brought him substantial returns; his investment performance over the next fifteen years rose to around 9% annual return, while during the same period, the UK stock market fell by 15%.

 

Keynes explained his transformation in a letter to a friend: "Macroeconomics is undoubtedly important, but the factors influencing macroeconomics are too numerous and complex for ordinary people to grasp. In comparison, finding undervalued good companies is much easier."

 

Robert Shiller, a recognized authority in macroeconomics and Nobel laureate, successfully predicted two market crashes. However, he repeatedly emphasized that he couldn't predict the market based on macroeconomic indicators, let alone use them to guide profitable investments.

 

Buffett, speaking at the University of Florida's business school, bluntly stated: "I don't study macro problems. We don't look at or listen to anything related to macro."

 

How to Make Money with Macroeconomics

 

One of the most outstanding macro investors in the world is Soros.

 

A significant factor contributing to his success is the caliber of information he can access, surpassing what is available to most.

 

For instance, in one of his seminal instances of shorting the British pound, Soros engaged in dialogue with the president of the Bundesbank, Helmut Schlesinger, during the process. He asked Schlesinger if Europe would eventually adopt a single currency. Schlesinger replied that if this currency were called the German mark, he would be very happy.

 

Soros immediately grasped the essence: Germany cared most about the status of its currency, while the fate of other member states was less important. So he immediately ordered his team to short the Italian lira. After successfully shorting the lira, Soros continued to short the pound, earning $1 billion in just one day.

 

People who can make money with macroeconomics not only need many years of profound experience but also the most direct and unique information. However, for most ordinary people, they simply don't have this ability or access to information.

 

How to Utilize Macroeconomic Analysis

 

Macroeconomic analysis can answer only limited questions. Relying solely on macro analysis to solve all investment problems is indeed asking too much of it. However, it is helpful to use macro analysis to identify the countries, sectors, and industries where potential investment opportunities lie. Therefore, by delineating the boundaries of macroeconomic analysis in investment, we can better understand its role and effectiveness.

 

Macroeconomic analysis aids in establishing investment direction. Choice holds greater significance than exertion. Macroeconomic analysis addresses the issue of choice rather than effort.

 

Excellent macro analysis may help you decide whether to invest in real estate or stocks. However, it cannot tell you which specific property to invest in. Specific property selection involves many micro details such as orientation, surrounding environment, and layout. Similarly, financial investment is the same; macro analysis may tell you whether to invest in stocks or bonds. Even macro analysis may suggest whether to focus on the technology sector or the consumer sector. However, once you've chosen the technology sector, macro analysis cannot tell you which specific company to choose. This involves factors such as the management's capabilities and corporate culture.

 

What Should We Study

 

Joel Tillinghast, a renowned investor who was a fund manager at Fidelity Investments, overseeing $40 billion, and also a protégé of the stock god Peter Lynch.

 

In a book called "Big Money Thinks Small," he writes that if you spend all day studying macroeconomic conditions, you'll drown yourself in a sea of information.

 

Macroeconomic issues are important but unknowable to ordinary investors. What is knowable? For example:

 

• How long your investment horizon is;
• How to allocate your assets effectively;
• When buying index funds, which one has lower fees and costs;
• If you have foreign currency, how to manage it better to increase returns.

 

Focusing on these matters is more beneficial for our long-term investment returns.

 

In conclusion, whether in business or investing, refrain from relying on predicting macroeconomics, as it's inherently unpredictable.