Why You Shouldn't Pay Attention to Macroeconomics When Investing
TLDR: Companies with competent leaders and sound fundamentals can weather almost any storm!
Macroeconomics refers to fiscal events (such as interest rates changes or tax hikes), natural events (such as earthquakes or floods), or geopolitical event (such as wars or trade deals) that affect regional or national economies.
When investing, it’s easy to get spooked by headline news about natural disasters or crazy politicians doing ever crazier things.
However, I am here to tell you that if you turn off all your news notifications, you will likely make batter investment decisions!
Here are the most common fallacies about the importance of macroeconomics in stock picking, and their counter-arguments:
Fallacy #1: Trends like Global Warming or “The Great Resignation” must have an impact on which companies will win and lose?
It is true that trends do tend to favor companies that are on them.
However, basing you investment decisions on these trends rather than companies’ fundamentals is foolish.
Sure, weighing the impact of trends heavily on stocks can be a winning strategy. For example, if you solely focus on the present EV trend you could have bought Tesla stocks. Even though its fundamentals are questionable at best, the stock has done insanely well.
The problem is that for every Tesla, there are hundreds of Nikolas (the company that got caught for making a fake hydrogen trucks and made investors lose billions of dollars). So this strategy is likely as good as spending your money at the nearest casino.
In the long run, balance sheets and news connected the company are way better indicators of a stock’s performance than the trends surrounding it.
A great example of how competent leadership and good fundamentals trump trends is one of the world’s most hated stocks: Philip Morris:
In 1968, when the dangers of smoking was officially reveled to the American public, the number of smokers have gone down every year since . If you would have based your investment decisions on trends, you’d likely stay far far away from Philip Morris.
Morally, you’d likely sleep better too, but financially you’d be a lot poorer!
If you invested a $1,000 in 1968 in Philip Morris, you would be $6,638,000 richer today. That’s enough money to buy you an apartment on Billionaire’s Row in New York!
Fallacy #2: You can’t just ignore sentiment and politics. If you ignore these factors you’ll miss political events that have a huge impact on your investments!
Sure, being so well read-up on Syria that you could predict the civil war before it happened is a great sign to sell whatever stocks you own there.
However, as a value investor, how many good governed, transparent companies could you invest in Syria’s public stock market?
The answer is very close to ZERO!
That why the first rule of value investing is to never invest in stock markets where reliable data is not available! This already insulates you from 99% of all politically unstable countries, and hence it is very unlikely that political maneuvers that could decimate your stocks occur.
However, even in politically stable countries there are many macro decisions that can destroy companies, so shouldn’t you be well-read up on them?
Yes, but only to a certain extent, and that extent is usually covered by information the companies you invest in release.
Let’s say you invest in a online betting company like Evolution Gaming, a company that has suffered a lot from the latest macroeconomic turbulence. Last year, both Turkey and the Netherlands decided to clamp down heavily on online betting.
Knowing that this could happen beforehand would surely have helped you parry the stock’s fall?
Yes it might have, but this risk was disclosed way in advance in the company’s quarterly reports.
Also, what ultimately led to the steep fall in the stock price was that Evolution Gaming was selling its solution to unlicensed betting sites; something you could only have found out if you studied the company in detail!
Fallacy #3: Don’t big Macroeconomic disasters have big consequences? Just look at Covid-19 or the Fukushima Earthquake. They have had devastating effects many investments!
This is perhaps the most potent argument in favor of reading the news before investing.
Yes, global disasters can make or break whole industries. The problem is that nobody certainly know when or how they will occur, so even if you read-up on them, you cannot act rationally based on the available information.
Of course, it is good to have an awareness of potential disasters looming in the horizon, but acting out of fear of those is a sure way to lose money.
For example, we know that Tokyo is going to have a massive earthquake some time this century.
Does that mean you should go and short-sell all earthquake insurance companies right now? Maybe, but as nobody knows exactly when or how this earthquake will happen, you cannot possibly time the purchase based on reading the news and risk losing your investment before any earthquake ever happen.
Also, when it is possible to predict when a disaster will strike, much smarter investors than you have already acted on that information. Hence, the opportunity to make money from it is already gone…
To Conclude
Sure, there are people making millions of $$ by studying and predicting macroeconomic factors when investing, but these people are usually experts in their field, often with millions of dollars in resources to ensure that they have the latest and greatest information.
You, on the other hand, are likely a retail investor who get your macroeconomic fill from paywalled news sites your refuse to pay for!
I am not saying that you should be completely unaware of newsworthy events around the world, but it is far too easy to make irrational investment decisions by acting on those events.
My final point of skipping the news before investing is that if you own stocks in good companies with competent leadership and good financials, the company will tell you about macroeconomic factors that could impact their business, for free!
To summarize: To make good investment decisions, focus on the company:
Study its investor relations information
Study its annual reports and historical financial data
Study its industry and learn about its product/service
Listen to the C-suite’s predictions about the company’s future
And don’t pay attention eye-catching headlines like “The World Economy is Collapsing 2023!” or “Everyone is Quitting Everywhere!” when making your investment decisions.