My views on the market, tech, and everything else

A Dozen Investors Talk about the Folly of Macroeconomic Forecasting and the Importance on Focusing on Valuation/Margin of Safety Today

1.  “Charlie and I don’t pay attention to macro forecasts.” Warren Buffett.  A genuine “value investor” determines “intrinsic value” based on “owner’s earnings” which will reflect what a private buyer would pay for the same share of the specific business.  Treating a share of stock as a share in a business is fundamental to value investing.  Yes, macro exists; no, it will not be a source of alpha for you.

2.  “I don’t read economic forecasts. I don’t read the funny papers.” Warren Buffett.  If you focus on the micro aspects of the particular business, the macro takes care of itself.  When Mr. Market is filled with fear, you will see relatively more micro bargains for individual stocks. And when the macro market is filled with greed, you will not see micro opportunities for individual stocks.

3.  “Of course, the macro questions are the hardest ones to figure out.  I am not trained to be an economist, and I don’t think economists get it anyway.   I am left with the bottoms-up, 10Q by 10Q analysis.”  Michael Price  Calculated on a bottoms-up basis, if you can buy a share in a business at a price greater than a private buyer’s hurdle rate and if a margin of safety is built in to that hurdle rate and it is the best opportunity available to you, you buy.

4.  “We don’t know what lies ahead in terms of the macro future. Few people if any know more than the consensus about what’s going to happen to the economy, interest rates and market aggregates. Thus, the investor’s time is better spent trying to gain a knowledge advantage regarding ‘the knowable’: industries, companies and securities. The more micro your focus, the great the likelihood you can learn things others don’t.” Howard Marks. By having a “micro focus” (i.e., not a macro focus)  you are concentrating on trying to understand the simplest possible system (a company).  It is in working hard to understand these simpler but still relatively complex systems that skilled value investors once in a while find a significantly mispriced bet.  When they find a favorable significantly mispriced bet they “bet big” on that fat pitch. It’s that simple. Berkshire results just out reveal that when fear was high after the recent financial crisis Buffett placed big bets on Goldman and a few other companies and “won” $10 billion betting on those fat pitches.

5.  “I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: Where is the one that is lowest priced in relation to what I believe its worth?” John Templeton. Great value investors are always thinking in terms of opportunity cost. If opportunity cost does not determine your hurdle rate for an investment, then what exactly does? The tooth fairy?

6.  “Nobody can predict interest rates, the future direction of the economy, or the stock market.  Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.” Peter Lynch. Value investors, when determining valuation, focus on value right now (i.e., in the present) to a private investor.  Businesses that have a strong moat and a relatively long operating history which are in the investor’s circle of competence are favored since they are more predictable.  Risk and losses come from not knowing what you are doing.  What can be simpler than this rule: invest only when you know what you are doing.  Risk is *not* measured by volatility, but instead the possibility of incurring harm or loss.

7.  “Nobody knows what the market will do. Forget the level of the market. The only thing that matters is the specific situation having to do with your stocks.” Bill Ruane. Mr. Market’s bi-polar nature is his gift to you since occasionally he will present you with great bargains or buy your assets at a premium.  Do *not* treat Mr. Market as wise and instead view him as an occasional giver of gifts to rational emotionally stable investors.

8.  “Avoid predictions and forecasts.” Barry Rithholtz. 

9.  “Gigantic macroeconomic predictions are something I’ve never made any money on, and neither has Warren.”  Charlie Munger. They can’t do it and neither can you.  So don’t try to do so.  Life is so much easier when you accept this and you sleep so much better too.

10.  “We need to stop pretending that we can divine the future, and instead concentrate on understanding the present, and preparing for the unknown. There is a simple, although not easy alternative [to forecasting]… Buy when an asset is cheap, and sell when an asset gets expensive…. Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance.”   James Montier.  Avoiding psychological denial is a fantastic way to avoid losses.  Investors can do better simply by being less stupid.

11.  “The last time I made any market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter based on the fact that I had one month’s experience.  Since then I have given up making predictions.” Ben Graham.  None of this is new.  Learning from the successes and failures of others is so much easier. Very few people can pick stocks as value investors and the likelihood that you are one of those investors is very small (2-5% of the population).  Warren Buffett points out a paradox:  by understanding they are the dumb money by purchasing a low fee index fund, “know-nothing investors” become the smart money.

12.  “Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.  It happens over and over and over.”  Charlie Munger. Stop thinking that the talking heads making macro predictions should guide your investing decisions.  Ignore them. Think for yourself!

Categories: Uncategorized