With the barrage of information coming at investors from so many directions in today’s modern world, it’s hard to figure out which piece is relevant and which is not.
It’s even tougher to tune out the irrelevant information as financial news media and the internet constantly bombard investors with articles teaching us how to invest or do better with our portfolios. A question which constantly crops up is – do investors need to be able to accurately predict economic indicators or policy to perform well in investing?
Macro-Economics Is Wide-Ranging
There are numerous elements which make up macro-economics, making it a wide-ranging and far-reaching discipline.
A few common ones are reported most often by financial media, such as Gross Domestic Product (GDP), Consumer Price Index (CPI), and unemployment rate. Other lesser known ones include the Producer Price Index (PPI) and housing starts, just to name a few. An investor would need to have a basic understanding and grasp of economics to understand and appreciate the many terms used. This is just the beginning when it comes to how tough an exercise forecasting is.
Forecasting Is Futile
Investors should also note that there are (too) many variables which impact GDP, CPI and other economic indicators, and these may interact in ways which cannot be anticipated even by the smartest and most well-read economists.
Political, social and legal factors also play a part in influencing economies, and macroeconomic forecasting is akin to trying to divine the future based on an almost uncountable and unknowable set of variables.
Minimal Impact On One’s Portfolio
The bad news is that it’s almost impossible to predict economic policy and direction, but the good news is that it should have a minimal impact on one’s portfolio.
Unless an economic policy is specifically industry or sector-driven, or targeted to influence certain segments of the economy, it should not have a significant impact on one’s security selection policy. It is far better to dig deep into individual companies to understand what makes them great, as investors are, after all, investing in individual companies and not in the economy itself.
The Foolish Bottom Line
To summarise, it’s important to know how economics has an impact on one’s portfolio and company choices, but there is no requirement for an investor to be able to predict macroeconomic indicators or the economic direction to do well in investing. I will end this article with a famous quote from Warren Buffett’s 1994 Shareholders’ Letter:
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.