Don’t waste time trying to predict markets and macro

It is hard work being a true investor – so many things to analyse. This means you do not have time to waste on pointless activity. The vast majority of your attention must be directed to business analysis. As Peter Lynch said “Stocks are not lottery tickets. There’s a company behind every stock. If a company does well, the stock does well. It’s not that complicated.” So concentrate on what makes the company do well.
Here are a few things people waste time on

• Trying to predict the stock market over weeks and months. That is a total waste of time. No one can predict the stock market. In the long run however, it is “weighing machine” according to Benjamin Graham and will properly weigh up the evidence on good and bad companies.  Short term “votes” (buy and selling actions of the crowd) are neither a guide to value nor a much of a worry to true investors.
• Trying to predict interest rates. “If anybody can predict interest rates right three times in a row, they’d be a billionaire. There can’t be that many people who can predict interest rates because there’d be lots of billionaires.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
• Trying to predict the economy. Macroeconomists have a terrible record of predicting major turning points, with regard to say recessions or inflation taking off. They are there only to make astrologers look good! Most of the time all an investor needs is a rough idea of how the economy is doing – detailed forecasts are not required. And emotions, such as fear and trepidation, or excitement over good growth prospects, is not required. Such worries and over-enthusiasm will merely distort thinking. Have faith in progression of companies and the economy over periods of years, through the economic cycle. Bumps in the road there will be, but if you hold soundly-run companies in good strategic positions you’ll ride through just fine. Peter Lynch said “if you spend 14 minutes a year on economics, you’ve wasted 12 minutes”.

They say that “young men knows the rules and old men know the exceptions”.  There are exceptional times – maybe once a decade, maybe once a quarter of a century - when it does pay off to focus on the macro picture.
Weirdly, we had two hits of this nature in just three years. Fortunately, some of us spotted the ingredients for macroeconomic trouble from Covid when it was still pooh-poohed as a likely problem by leaders in this country, so I was able to sell shares vulnerable to recession into a sanguine market willing to pay good prices.
The second macro issue was the excessive economic stimulus from loose monetary policy and very generous fiscal policy (stuffing money into people’s pockets). All the ingredients were there for a boom, followed by inflation, and then central bank reaction. It seemed to me fairly predictable – so I enjoyed the boom with lots of equities, and enjoyed the inflation period with lots of cash so I could hunt for bargains when Mr Market was gloomy.
We are no longer in extraordinary times and so the macro side of my brain can go back to sleep – just occasionally to open an eye every now and then to see if there is anything threatening. I hope the macro peace - with normal fluctuations and concerns to be sure - continues for a couple of decades now so I can be fully invested in UK equities all the time.
The type of economics that is very useful
So macroeconomic prediction have very limited value.
But other economic data, things like what is happening to used car prices when you are analysing a car dealing chain are very useful, or what happening to the price of ethylene when you are looking at chemical companies, or to house prices if you examine a house building firms. Now those are truly valuable things to follow.
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected])