Warren Buffett (Trades, Portfolio) is famous for telling investors that he and Charlie Munger (Trades, Portfolio) don’t pay any attention to macroeconomics and that they (other investors) would be well served by ignoring macroeconomics as well.
There are a few choice Buffett quotes on the subject, such as "Forming macro opinions or listening to the macro or market predictions of others is a waste of time" as well as “I don’t read economic forecasts. I don’t read the funny papers” and “Charlie and I don’t pay attention to macro forecasts. We’ve worked together now for 54 years, and I can’t think of a time when we made a decision on a stock or on a company.” So it’s pretty clear that both Buffett and Munger have a low opinion of the place macroeconomics has in an investment process.
I respectfully disagree. Macroeconomics is important for investors. Now with that being said I don’t think Buffett is saying to completely ignore macroeconomics. After all, when Buffett made several investments at the depth of the last recession he was making an implicit macroeconomic forecast that the economy would improve. A lot of what Buffett is referring to when he says to ignore macroeconomics is the talking heads on TV, the “gurus” who are always calling for a recession, the official economic forecasts from the IMF and the Federal Reserve, etc. On that point Buffett and I would agree. But I don’t think it’s wise to completely ignore the macroeconomic aspect of investing.
To see what happens when one ignores macro let’s take a look at Tweedy Browne (Trades, Portfolio) as a case study. It offers two global mutual funds plus an additional concentrated international (low exposure to the U.S. market by design) fund.
Tweedy Browne (Trades, Portfolio) has a long, storied history as a successful value investment firm. It is filled with smart, talented, hard-working people, and I’m an avid reader of its investment commentary whenever it comes out. One thing that struck me reading its commentaries over the years was how it largely ignored the macroeconomic picture and simply focused on investing in high quality companies trading at attractive prices.
Its two main funds, the Tweedy Browne (Trades, Portfolio) Value Fund (TWEBX) and the Tweedy Browne (Trades, Portfolio) Worldwide High Dividend Fund (TBHDX) have been underweight U.S. equities for as long as I can remember (U.S. stocks make up around 50% to 60% of global stocks depending on which indices you use). Tweedy Browne (Trades, Portfolio)’s value fund as of May 31 currently has about 42% of its holdings in U.S. stocks and their dividend fund has only 17% in U.S. stocks. The total allocations are shown below.
We can see that they have high exposure to Europe as a whole and low exposure to Japan and the U.S. The post-recession performance of the two Tweedy Browne (Trades, Portfolio) funds since 2009 is below along with the performance of Morningstar World Stock benchmark.
As you can see both funds underperformed the world benchmark. That’s no surprise given that the U.S. stock market has been the best-performing developed market (and Japan has been quite good as well). The fact that both funds are still pretty close to the benchmark is a testament to just how good their stock-picking skills are. They managed to get returns close to the world benchmark despite being underweight (in the case of the dividend fund, severely underweight) the best-performing stock market.
Tweedy Browne (Trades, Portfolio)’s returns offer investors a good illustration of why macroeconomic analysis is needed. Investors who had a good grasp on the macroeconomic situation in 2009 and beyond would have known that Europe was beset with problems. The European Union still hadn’t solved the core issue of how vastly different economies could all share the same currency. This lead to periodic crises and bailouts and the implementation of growth destroying austerity across much of the EU. Investors also would have known that the low interest rate and various quanitative easing (QE) programs begun by central banks around the world were noninflationary and that hoarding cash and gold was not necessary. A good grasp of basic, common-sense macroeconomics would have allowed investors to concentrate on finding stocks in attractive markets.
Imagine what Tweedy Browne (Trades, Portfolio)’s returns would have been if it had added some more macroeconomic analysis to its investment process. Hopefully, this case study is convincing enough to encourage investors to look at the bigger economic picture as well.
In our next article we will go over some basic macroeconomic prinicples that can help investors determine where the best pool of investment opportunities are.
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