Literally hours ago, our wonderful website produced an article about the macroeconomic viewpoint, asking if it can help bottom-up value investors. While I agree with the main idea, I had been expecting a great read for my lunch break (along with a transcript of Tweedy and Browne's 2000 speech at Columbia U.). Unfortunately I finished the entry with disappointment over the lack of depth.
Basically the article can be summed up as:
1. "Oh, we interviewed Steven Romick but we're not gonna post the transcript here since we're still writing it!"
2. "Who's Romick, you ask? Oh he's the VI who avoided financials before the bubble burst, unlike many other VI's and prominent contemporaries!"
3. "Let us take this time to remember Peter Lynch, who tells us to focus the business model and the sustainability of their business model."
In retrospect, the key takeaway really was Peter Lynch's statement.
Anyone who picks this apart can easily see he was referring to the industry here, which may or may not be ultimately tied to overall macro environment.
Take China for example, whose steelmakers are reportedly struggling with weakening demand and overcapacity. PRC has approved multiple government projects (and recently published them to induce euphoria among watchers and foreign economists alike) that must be invested in a PPP setup — funded by both the State and the Private Sector — whose ultimate productivity (insofar as the state's finances are concerned) are uncertain and can potentially end up like Spain's phantom infrastructure.
Bottom-up value investors who care about the macro would see that the government is attempting to stimulate economic growth. Whether or not steelmakers will grow or stagnate further depends on these projects following through (domestic demand), external demand for steel (international sales), or at least the success of their struggle to diversify from the steel industry (alternative sources of income; if they choose to finance part of the project, then the question of their usage comes into play).
This information clearly affects the value investor's perceived risk and the corresponding intrinsic value estimate, which in turn determines the margin of safety and the decision to deploy capital or not.
The "macro" can also equate to things that don't end strongly impact the business fundamentals, but slash the market price down a great deal, which again requires knowledge of the product and the business model of the underlying company.
Let's take Bernanke's QE3. I've come across multiple sources that, in spite of high expectations for QE3, downplay the impact of QE3 (e.g. Mauldin, Alphaville, even Damodaran) and one had a former Fed governor outright proclaiming that monetary stimuli "can only do so much" when fiscal policies, growth of the real economy, and underlying demographics all carry much higher weights than money printing alone. A recession slapped on us by the fiscal cliff will lower stock prices and can potentially threaten medium-term sales for the defense industry, and the short-term performance for businesses reliant on spending by consumers and the private sector.
Value investors who are aware of other macro fundamentals can: (i) hedge on the QE's being overshadowed by other, more relevant indicators, (ii) average down on the high-beta company when the market implodes from the betrayed expectations, (iii) pile a little more cash for the recession ahead, and/or (iv) identify value opportunities in the defense industry (Science of Hitting has FLIR in his sights), either putting your foot through the door by a small yet sizable acquisition (to average down significantly later on) OR placing it in your watch list.
And if the decision was wrong to begin with and there's no recession or decreased quarterly performance of other industries in mainstream media like MarketWatch and Jim Cramer? Why should you care? You've already acquired the companies at a good price, and if you can't get more at the same or better, then move on, look for other opportunities, and direct the accumulated capital there before inflation destroys you. It's as simple as that.
To conclude, the macro is necessary for a bottom-up value investor. It is useful in adjusting intrinsic value estimates and perceived risk, and can be used to justify capital hoarding for "just in case" scenarios.
In the meantime, I'm going to bet that the transcript of GuruFocus's interview with Romick will contain these points. Anything beyond that... well, we're all here to learn, right?
Basically the article can be summed up as:
1. "Oh, we interviewed Steven Romick but we're not gonna post the transcript here since we're still writing it!"
2. "Who's Romick, you ask? Oh he's the VI who avoided financials before the bubble burst, unlike many other VI's and prominent contemporaries!"
3. "Let us take this time to remember Peter Lynch, who tells us to focus the business model and the sustainability of their business model."
In retrospect, the key takeaway really was Peter Lynch's statement.
Anyone who picks this apart can easily see he was referring to the industry here, which may or may not be ultimately tied to overall macro environment.
Take China for example, whose steelmakers are reportedly struggling with weakening demand and overcapacity. PRC has approved multiple government projects (and recently published them to induce euphoria among watchers and foreign economists alike) that must be invested in a PPP setup — funded by both the State and the Private Sector — whose ultimate productivity (insofar as the state's finances are concerned) are uncertain and can potentially end up like Spain's phantom infrastructure.
Bottom-up value investors who care about the macro would see that the government is attempting to stimulate economic growth. Whether or not steelmakers will grow or stagnate further depends on these projects following through (domestic demand), external demand for steel (international sales), or at least the success of their struggle to diversify from the steel industry (alternative sources of income; if they choose to finance part of the project, then the question of their usage comes into play).
This information clearly affects the value investor's perceived risk and the corresponding intrinsic value estimate, which in turn determines the margin of safety and the decision to deploy capital or not.
The "macro" can also equate to things that don't end strongly impact the business fundamentals, but slash the market price down a great deal, which again requires knowledge of the product and the business model of the underlying company.
Let's take Bernanke's QE3. I've come across multiple sources that, in spite of high expectations for QE3, downplay the impact of QE3 (e.g. Mauldin, Alphaville, even Damodaran) and one had a former Fed governor outright proclaiming that monetary stimuli "can only do so much" when fiscal policies, growth of the real economy, and underlying demographics all carry much higher weights than money printing alone. A recession slapped on us by the fiscal cliff will lower stock prices and can potentially threaten medium-term sales for the defense industry, and the short-term performance for businesses reliant on spending by consumers and the private sector.
Value investors who are aware of other macro fundamentals can: (i) hedge on the QE's being overshadowed by other, more relevant indicators, (ii) average down on the high-beta company when the market implodes from the betrayed expectations, (iii) pile a little more cash for the recession ahead, and/or (iv) identify value opportunities in the defense industry (Science of Hitting has FLIR in his sights), either putting your foot through the door by a small yet sizable acquisition (to average down significantly later on) OR placing it in your watch list.
And if the decision was wrong to begin with and there's no recession or decreased quarterly performance of other industries in mainstream media like MarketWatch and Jim Cramer? Why should you care? You've already acquired the companies at a good price, and if you can't get more at the same or better, then move on, look for other opportunities, and direct the accumulated capital there before inflation destroys you. It's as simple as that.
To conclude, the macro is necessary for a bottom-up value investor. It is useful in adjusting intrinsic value estimates and perceived risk, and can be used to justify capital hoarding for "just in case" scenarios.
In the meantime, I'm going to bet that the transcript of GuruFocus's interview with Romick will contain these points. Anything beyond that... well, we're all here to learn, right?
