Never Mix Your Views Of The Economy With Investing

I think one of the worst things investors can do is to mix their views on the economy with their investing actions.

The economy’s going to slow? Sell your stocks. The economy’s going to hell in a handbasket? Sell NOW! The economy looks great? Let’s buy stocks!

These are things an investor should not be doing. But, you don’t have to take just my word for it. You can also ask Seth Klarman.

While his profile with the general public is nowhere near as high as that of say, an investor such as Warren Buffett, Klarman’s a bona fide investing legend in his own right. According to a January 2015 Bloomberg article, Klarman had led his investment firm, the Baupost Group, to annualised returns of 17% over the past three decades at that point in time.

I had recently chanced upon an old 1991 interview that Klarman had with investing publication Barron’s. In the interview, Klarman said (emphasis mine):

“One thing I want to emphasize is that, like any human being, we can discuss our view of the economy and the market. Fortunately for our clients, we don’t tend to operate based on the view. Our investment strategy is to invest bottom up, one stock at a time, based on price compared to value.

And while we may have a macro view that things aren’t very good right now — which in fact we feel very strongly — we will put money to work regardless of that macro view if we find bargains. So tomorrow, if we found half a dozen bargains, we would invest all our cash.”

Klarman alludes to a great point that I think many investors do not realise: Stocks can perform very differently from the economy.

For instance, in 2009, Singapore’s economy shrank by 0.6%. But, the local stock market benchmark, the Straits Times Index (SGX: ^STI), had gained 64.5%. A very possible reason for that is because the index had carried a really low valuation at the start of 2009 – its historical price-to-earnings (PE) ratio at that time was just 6.2, which was lower than even the trough of 11 seen during the Asian Financial Crisis.

It’s a similar picture with individual stocks. Vicom Limited (SGX: V01) had a PE of just 8.4 at the start of 2009; its stock ended the year up 47%. Keppel Corporation Limited (SGX: BN4) is another one; its shares were valued at merely 5.7 times trailing earnings at the start of 2009 and they ended up climbing by 90% in price for the year. I could go on, but you get the picture.

As Klarman had said – it’s okay to have a view of what the macro-economic environment looks like. But one shouldn’t let that view interfere with their investments. At the end of the day, it’s the relationship between a stock’s price and its value that matters the most.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Vicom.