Not many macroeconomic indicators are consistently predictable. Even fewer can truly help an investor “beat the market.” Rather than focusing on statistics like GDP figures, trade data or interest rates, investors should target areas where they can have an edge.
Investors need to think micro, not macro.
Thinking micro means using a bottom-up approach. For an equity investor, this means evaluating a company’s future cash flows by understanding its business model, industry and risks. The benefit of a micro approach is that it allows investors to more readily put the odds of success in their favour. After all, it is much easier to evaluate the attractiveness of one specific company than it is to predict what is going on in an economy made up of thousands.
It is much easier to evaluate the attractiveness of one specific company than it is to predict what is going on in an economy made up of thousands.
Remarkably, a micro approach is also highly relevant to evaluating the big risks in the macro economy. This is because a micro perspective makes it easier to understand an investor’s actual risk and return exposure. For example, there is a tendency among investors to bucket all of their investments from a given geographic region – such as Europe – into one group, and then to make a decision based on that entire region’s economic climate data. But this kind of crude grouping fails to consider the underlying drivers of each individual investment. A German exporter with most of its sales in China will not rely on the German consumer in the same manner as a domestic TV retailer. Simply using macroeconomics to make portfolio decisions is like using a pitchfork to eat rice. Investors need the equivalent of a “chopstick” investment approach in order to manage risk on a more granular level.
It is easy to get lost in the overwhelming array of macro statistics released on any given day. Thankfully, most of these numbers can be ignored. It may be boring, but investors are better off narrowing their focus to areas where they can put the odds in their favour.