When Should We Pay Attention To Macro?

When Warren Buffett ran his investment partnerships in the 1950s and 60s, he had a series of ground rules which he gave to partners in advance which were intended to educate his investors on how he would invest their money.

Ground Rule No. 6 was:

"I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership."

Buffett acknowledges that this is a bit of a vague rule. The principle seems simple enough. We base decisions on how we think the individual businesses will do, not on how we think the markets will do, especially in the short term. But in reality it is a bit more complicated than that.

Howard Marks's most recent memo (link below in comments) talks about how he has been able to successfully make 5 market predictions over the past 25 years. In all of these instances, the market was at such extremes that it was possible to guess there would be some reversion to the mean. At all other time periods Marks says that predicting the path of markets is probably a fool's errand.

So on the one hand, we have Buffett saying that he never makes predictions about the market, and then on the other hand we have Howard Marks, a very successful investor in his own right, saying basically the same thing but with the caveat that at the extremes it is possible to make a probabilistic bet about where the market is going.

What complicates this further is that even though we may not make decisions based on macro, it's not like we can completely ignore the macro landscape. Macroeconomic cycles will effect the fundamentals of a business. As an example, a number of businesses we own are currently being affected by a weak advertising market. It's not like we're unaware of this. We just don't judge the quality of these businesses based on how the current macro affects them.

So I understand a little bit about why people get confused about when to pay attention to the macro and when not to.

It's particularly telling that in Buffett's 1966 letter to his partners, he talks about how some partners felt that the market was headed for continued declines after the Dow had dropped from 995 to 865 in 1966. Some partners even seem to be questioning or (gasp) criticizing Buffett's "buy and hold" strategy. This is wild! These are people who had invested their money with the best money manager in the world, at a time when Buffett had just completed a full decade of hall of fame returns. During that decade Buffett had consistently referenced his own ground rules that he doesn't make predictions about the market.

But STILL people questioned him because it's just so hard for most people to ignore the macro environment.

So I have no illusions that I can convince everyone that macro doesn't matter that much. But like Buffett, I do think it's important for investors to understand our "ground rules".

We choose to focus on the fundamentals of the business because that is where I think we add value. And for that same reason we pay very little attention to macro-economics and particularly ignore macro-economic forecasts because for us, they just don't add that much value. This year is a fantastic example as most macro forecasters were predicting a recession early in 2023. People who followed that advice and invested based on it have completely missed this market rally.

In the end, we don't judge ourselves on the short term movements of markets either. If we are able to add value over a variety of macroeconomic environments, then that will be the true test if we've created value for our investors. But one thing I know for sure is that we will continue to follow our own ground rules on how to invest. And that means being aware of the macro environment, but not ever letting macro guide our investment decisions.