Money and Finance
One of my key takeaways from the Berkshire Hathaway conference last weekend was that Buffett and Munger don't spend a lot of time, if any, thinking about the direction of the broader economy when they make investment decisions.
At one point, Buffett and Munger joked (half-joked?) that they thought any company that employs an economist has one employee too many. Munger said it was best to declare yourself ignorant about macro forecasts and, when it comes to investing amid uncertain economic times, said that he and Buffett "keep swimming and let the tide take care of itself."
Other investors I admire had similar feelings about incorporating macroeconomic forecasts into their investment process.
As Philip Fisher wrote in Common Stocks and Uncommon Profits:
In February 2009, for example, I started a small position in a Treasury Inflation-Protected Securities (TIPS) ETF in an effort to "play" inflation. The 7% or so gain I made on that investment pales in comparison to the money I would have made simply putting that sum into a S&P 500 ETF or into one of the other stocks I bought during the market downturn. (I mourn such errors of omission more than those in which I invested but ended up losing money.)
Still, it's important to keep tabs on the macroeconomy, even if we're not actively forecasting it.
As Howard Marks put it:
Truly great businesses run by able management teams should be able to adapt to various economic scenarios and deliver solid results across a full business cycle and beyond. However, it's much more difficult to predict when the cycle will turn, how much it will turn, and for how long it will turn. As such, our research time is much better spent analyzing things like competitive dynamics, strength of the management team, and the company's financial health. We have greater odds of being right on this than we do on forecasting macro trends.
How do you use economic forecasts, if at all, in your research process? Please let me know in the comments below or on Twitter @toddwenning.
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Money and Finance
Should Long-Term Investors Mind the Macro?
One of my key takeaways from the Berkshire Hathaway conference last weekend was that Buffett and Munger don't spend a lot of time, if any, thinking about the direction of the broader economy when they make investment decisions.
At one point, Buffett and Munger joked (half-joked?) that they thought any company that employs an economist has one employee too many. Munger said it was best to declare yourself ignorant about macro forecasts and, when it comes to investing amid uncertain economic times, said that he and Buffett "keep swimming and let the tide take care of itself."
Other investors I admire had similar feelings about incorporating macroeconomic forecasts into their investment process.
As Philip Fisher wrote in Common Stocks and Uncommon Profits:
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 make 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.Here's Peter Lynch on the subject:
It's lovely to know when there's recession. I don't remember anybody predicting (that in) 1982 we're going to have 14 percent inflation, 12 percent unemployment, a 20 percent prime rate, you know, the worst recession since the Depression. I don't remember any of that being predicted. It just happened. It was there. It was ugly. And I don't remember anybody telling me about it. So I don't worry about any of that stuff. I've always said if you spend 13 minutes a year on economics, you've wasted 10 minutes.I recall during the financial crisis spending a disproportionate amount of time thinking about macroeconomic matters - worrying about hyper-inflation, interest rates, etc. - that would have been much better spent searching for great businesses that had been beaten down.
In February 2009, for example, I started a small position in a Treasury Inflation-Protected Securities (TIPS) ETF in an effort to "play" inflation. The 7% or so gain I made on that investment pales in comparison to the money I would have made simply putting that sum into a S&P 500 ETF or into one of the other stocks I bought during the market downturn. (I mourn such errors of omission more than those in which I invested but ended up losing money.)
Still, it's important to keep tabs on the macroeconomy, even if we're not actively forecasting it.
As Howard Marks put it:
In my opinion, the key to dealing with the future lies in knowing where you are, even if you can't know precisely where you're going. Knowing where you are in a cycle and what that implies for the future is very different from predicting the timing, extent and shape of the next cyclical move. (his emphasis)I would think that Buffett, Munger, Fisher, and Lynch would agree with this statement. Then again, maybe not, but I'm not sure how you invest in any company - especially a commodity-linked business - without having an opinion on where that business might be in its cycle.
Truly great businesses run by able management teams should be able to adapt to various economic scenarios and deliver solid results across a full business cycle and beyond. However, it's much more difficult to predict when the cycle will turn, how much it will turn, and for how long it will turn. As such, our research time is much better spent analyzing things like competitive dynamics, strength of the management team, and the company's financial health. We have greater odds of being right on this than we do on forecasting macro trends.
How do you use economic forecasts, if at all, in your research process? Please let me know in the comments below or on Twitter @toddwenning.
Related posts:
- Philip Fisher's 15 Points to Look for in a Common Stock
- A Closer Look at Peter Lynch's "Principles"
- When Should You Sell a Good Stock?
Stay patient, stay focused.
Best,
Todd
Subscribe to Clear Eyes Investing by Email
- The Question Warren Buffett Used To Ask Every Ceo...
From Charlie Munger: The Complete Investor: Munger is a believer in the investment approaches and ideas of Philip Fisher. Fisher was a successful investor based in California who wrote an influential book entitled Common Stocks and Uncommon Profits,...
- Some Investing Advice For My Son
My wife and I recently welcomed our son into the world and, like any new parent, I've been thinking about all the things I'll need to teach him as he grows up -- how to ride a bike, how to read, and, of course, how to invest. So with a few minutes...
- The Difference Between A Good Company And A Great Company
Consider the largest stock holding in your portfolio. If I were to ask you to list ten reasons why you own the stock, what would you say? You might talk about the company's strong competitive position, its attractive profit margins, its solid balance...
- Why You Should Probably Own Fewer Stocks
I think the average person could know three or four or five companies very well. They could lecture on those three or four or five companies, and if one or two of 'em becomes attractive, they buy 'em...You have to know the story. - Peter...
- A List Of Good Investing Books
Must-Haves for Serious Investors Benjamin Graham. The Intelligent Investor. The value investor's bible. Make sure you get an edition with Jason Zweig's commentaries.Peter Lynch. One Up on Wall Street. The retail investor's bible. Lynch's...