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Wednesday, 16 March 2022

Ignore macros at your own peril


We spend essentially no time thinking about macroeconomics factors. In other words, if somebody handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or interest rates or whatever it might be for the next two years, we would not pay any attention to it. ~ Warren Buffett

If you spend 13 minutes a year on economics, you’ve wasted 10 minutes. ~ Peter Lynch

I am a lifelong admirer of Buffett and to a lesser extent of Lynch. But in this particular aspect, I think both of them are completely wrong.

Before you start trolling me and asking who is this guy who dares to contradict two of the greatest investors in the world, hear me out 😊

Major market crashes happen on macro factors

Think back to all the market crashes you have witnessed or read about. Covid crash, US Housing crash of 2008, Dotcom crash, Harshad Mehta crash. All have been results of some macro event. You may have done a lot of detailed fundamental research on a company and invested. But one fine morning the business or the market situation completely changes. Due to external factors completely beyond the control of the business, its earnings can get seriously impacted. Buffett, for example, had positions in the ‘Big 4’ - American, Delta, Southwest, United before Covid. He had near 10% stake in each. His logic was fuel prices were on a secular downtrend and airlines had become like the railroads. So much so, he was even contemplating buying an entire airline (https://www.cnbc.com/2018/02/26/buffetts-hunting-for-deals-and-wouldnt-rule-out-owning-an-entire-airline.html). Then Covid crisis came. Macro event. Nothing to do with the airlines’ businesses. No fundamental research about the industry or company could have predicted the unprecedented contraction in earnings. Buffett sold out all his stocks. Possibly he panicked at the wrong time, but that is a story for another day.


Swimming with the tide

Investors make money when they are on the right side of a business and economic trend. Buffett and Lynch and other US based investors in the last fifty years have done so well primarily because they had huge economic tailwinds behind them. Look at the counter factual, you will not hear too many great Japanese investors in the last 30 years. Why? Because Japan has not been growing or has been in a recessionary environment during this period. Same for Europe. Can you name one great European investor who invests in Europe only? You will likely struggle a lot. The most European names that you may think of will be global investors and have majority of their investments in US or global companies.

The fact is it is very difficult to swim against the tide. As a business and consequently as an investor. Good investors intuitively understand this. Arguably, one of the main reasons that there are so many great investors from the US in the last fifty years is because US has been the biggest economic growth engines in the world. Similarly, if you go back two centuries, you will find the world’s richest people originating from UK, Germany and France.

Macro is too difficult to predict

The most common argument against macro is that it is too difficult to predict reliably. I completely agree. But so is bottom-up investing. There are far too many factors that influence a business than can be analysed reliably. And that is the sole reason no investor has a 100% track record. Everyone makes mistakes. And it happens because they base their decisions about the future on their understanding of the past.

Understanding the macro context

Understanding and accepting that macro plays a supremely important role in investing is critically important. Saying that it is meaningless is downplays the understanding that you are but a small part of a much larger cycle of things.

Understanding macro does not mean using it to forecast future events. Understanding means you are aware of the lay of the land. It is like a cricket captain looking at the pitch and ground conditions and then deciding the team that will be optimal for the conditions. Different pitch, weather and ground conditions can necessitate different team selections. That is exactly how macros should be used. To understand the underlying context of what is happening around us. Once you understand the context, you are free to position your investments accordingly and can decide to act on or ignore certain events.

In summary, when you ignore the larger picture and focus only on bottom-up stock picking, you over-emphasise the importance of the business and ignore their operating environment, which more often than not, actually has a larger influence than individual business characteristics.

This article first appeared ion CNBC-TV18.


  1. Glad you've written this. Totally agree. While it's ok to learn and grow from Buffet and Munger, the church of value investing has elevated them to gods, and their gospels as dogmas.
    People wld be surprised to know, the most successful investor are not the above two, but Stan Duckenmiller, who compounded 30% for 30 yrs. He, like you've written here, takes a more organic and flexible look to investing using macro as well as micro ideas.

    Everything matters. Business, trends, psychology, promoter, balance sheet, everything. And for me, more than arcane ideas of value investing, common sense is the most vital ingredient for successful investing. As well as staying humble and flexible and focussed.

  2. Sir, when I read "Before you start trolling me and asking who is this guy who dares to contradict two of the greatest investors in the world, hear me out" by and large I guessed the bigger picture.

    One has to be in the right time and right place (Space - Time), in Japan there may be an extra ordinary stock picker but may have made no money in last 30-20 year as entire market didn't gave any meaningful return. An average american stock picker may be sitting on 100x return, as he/she was in right time and place by thought or by luck.

    Thanks a lot of the article.