Role of Macro Factors in Investing Decision
Posted on 05. Mar, 2011 by TheFreeInvestor in Industry Trend, Investing Philosophy
Readers of my blog might already know that I am a longterm investor and view my investments as “ownership” of a firm rather than a short term “trade” view (mostly). For most individual investors, I believe, an ownership approach has the best chance to create long term wealth. In that context, the question is how much one should focus on the macroeconomic variables and their impact on the firms of interest.
On one end of the spectrum, many of the mainstream investment professionals pay a lot of attention to the economic measures and adjust their portfolio to take advantage of the macro changes or protect against the changes (supposedly). At the other end of the spectrum, Peter Lynch, the great growth investor famously said, “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”
My philosophy about macroeconomics analysis is similar to that of Peter Lynch, though not that extreme. As a small independent investor, I don’t have the problem faced by Warren Buffett or any other large investment manager — they have to make BIG bets to have a material impact on their portfolio performance. So, if they can’t invest in small firms selling temporarily at a cheaper price then they might have to look at large macroeconomic factors to find underpriced large opportunities.
Tracking and analysis of macroeconomic changes can be categorized into two separate buckets.
1. Impact on current businesses:
As an investor with the “ownership” long term approach, I look at macroeconomic changes similar to the way a business owner will look: How is this going to impact my business outlook, top line and bottom line? When it comes to selling, I am a trigger shy investor. So, a dark outlook in short term due to worsening economic environment is not enough to exit an investment as long as the long term prospects and original investment thesis hasn’t changed. A sole owner of a business is unlikely to sell the business at the first sign of macro economic trouble, neither am I.
2. Opportunity for new investments:
Macroeconomic trends and changes, both positive and negative changes, can be great places to look for new opportunities. To look for new promising growth companies, the macroeconomics trends can be used as a good screening criteria. Recently, I have been investing in many companies riding the “Digital Entertainment” trend.
Similarly, when the marco trends for a industry/sector looks bad, the market tends to paint all companies in the industry/sector with the same broad stroke and drives their prices down. The well run businesses in those firms can be a great investments in the long run.
Therefore, though I don’t track unemployment, GDP growth, and market sentiment index etc as closely as majority of investment professionals, I do pay some attention (more than 13 minutes a year) to the macro factors and think about how it will impact the businesses that I own and where I can look for new opportunities.
Over time, I plan to add a macro/economic indicators dashboard page to my blog to keep track of macro data points that are relevant to my existing investments and areas of interest for new opportunities.
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