Spotlight: The Folly of Macroeconomic Forecasting

Is it worth studying the macro factors while analysing a stock? The answer is both Yes and a No. We explore what kind of macro should an investor be concerned about and what should be avoided.

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

We look at opportunities, as they come along, we try to figure whether we can understand the long term economic prospects of the business. A lot of times the answer is no, then we forget it. We are not making any judgment about where the market is going or we are not looking at any macro factors.

My partner Charlie Munger and I have been working together now 55 years. We’ve talked about every business you can imagine and stocks. We have never had one decision that involved a macro factor. It just doesn’t come up.” ~ Warren Buffett

A profession that has been the butt of most jokes is that of an economist. Though I am sure it is not fun being an economist, whose work involves examining a system with, literally, billions of different moving parts and then trying to come up with predictions or reasonable explanations that, quite frankly, don’t actually exist.

I still remember what they taught me in my college’s macroeconomics class. The equations were always assuming something.

If government increases spending by X, output would grow by Y, but only if you assume taxes weren’t used to support the spending, only if you assume full employment, only if you assume full price elasticity, only if you assume no substitution effect, etc. In short, macroeconomics was and remains a science that behaves with the certainty of physics, but has the track record of alchemy.

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