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Ignore macro and politics?


bargainman
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This has been brought up numerous times and I thought I'd ask again given the current political and macro climate.  It used to be the value investor 'standard operating procedure' to ignore the macro and politics and just focus on the company and its intrinsic value.  Since the financial crisis it seems that no one believes this is wise any longer.  It seems like every other day there's something at the macro level or the political level that could have a large effect.  Everything from europe to the debt ceiling to regulation or lack of regulation to ineffective politicians..  So what do you do?  What have members on this board done?  I find it kind of frustrating to read about politics and the greater environment, perhaps because it's just depressing and antagonistic all the time.  But if I don't I'm afraid I'll miss out on what happened in 2008 all over again..  Would love to hear what the wise folks on this board think..

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I think Sam Mitchell said it best a couple of years ago at our AGM:  "You just can't ignore the macro in some cases!" 

 

So my take is you pay attention to what is happening, but in general you stick to the fundamentals of Graham and Buffett...buy cheap, sell dear.  If you start to see things that are unique in the macroeconomic environment, where the consequences could be dramatic, you price that into your margin of safety.  That's really all you can do, since none of us can see the future and hindsight is always 20/20.  Cheers! 

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I think Sam Mitchell said it best a couple of years ago at our AGM:  "You just can't ignore the macro in some cases!" 

 

 

Great point. Trying to make macro calls like the typical strategist is a mug's game. However, there are times when animal spirits drive markets to such extremes that it would be stupid not to pay attention to the macro environment. Despite what has been said about Buffett ignoring market timing, there have clearly been times when he has made macro calls - when he returned money to Buffett Partnership investors; at the start of the long bull run in the early 80s; the tech bubble in 2000; shorting the USD. In 2008 when he bought heavily into the market, he would not have been able to do so if he had been fully invested so he must have made a bearish call of sorts prior to that even if he did miss the housing crisis.

 

The question is whether we are in such an extreme environment right now. The markets are not at valuation extremes but financial leverage worldwide is (going by the Rogoff/Reinhart book). I think it is prudent to consider the possibility of economic shocks ahead especially if the excesses in leverage are not dealt with in a sensible way. The problem I have is figuring out how the Western economies can address the leverage issue without severely crimping economic growth which in turn means that the electorate will not allow their politicians to do the right thing until they have no choice (as in Iceland, Greece and Ireland).

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I think Sam Mitchell said it best a couple of years ago at our AGM:  "You just can't ignore the macro in some cases!"  

 

 

Despite what has been said about Buffett ignoring market timing, there have clearly been times when he has made macro calls - when he returned money to Buffett Partnership investors; at the start of the long bull run in the early 80s; the tech bubble in 2000; shorting the USD. In 2008 when he bought heavily into the market, he would not have been able to do so if he had been fully invested so he must have made a bearish call of sorts prior to that even if he did miss the housing crisis.

 

I don't think you can clasify these examples as making a macro call. I think it was simply the case of buying only when things were cheap. If he could not find cheap stuff then he did not buy or was not able to buy. Thats the way I see it as far as above examples are concerned..

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I think Sam Mitchell said it best a couple of years ago at our AGM:  "You just can't ignore the macro in some cases!"  

 

 

Despite what has been said about Buffett ignoring market timing, there have clearly been times when he has made macro calls - when he returned money to Buffett Partnership investors; at the start of the long bull run in the early 80s; the tech bubble in 2000; shorting the USD. In 2008 when he bought heavily into the market, he would not have been able to do so if he had been fully invested so he must have made a bearish call of sorts prior to that even if he did miss the housing crisis.

 

I don't think you can clasify these examples as making a macro call. I think it was simply the case of buying only when things were cheap. If he could not find cheap stuff then he did not buy or was not able to buy. Thats the way I see it as far as above examples are concerned..

 

But certain businesses require a sense of macro conditions. In the most recent interview with Charlie Rose, Buffett suggested that months sold in housing might be overstated (he actually just referenced inventories but I am making the leap) and that improved residential spend and home prices would lead to greater than anticipated growth. To make that statement, he probably has some estimate of mortgage roll rates, cures, and other factors related to the speed of the wind down of the shadow inventory.

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But certain businesses require a sense of macro conditions. In the most recent interview with Charlie Rose, Buffett suggested that months sold in housing might be overstated (he actually just referenced inventories but I am making the leap) and that improved residential spend and home prices would lead to greater than anticipated growth. To make that statement, he probably has some estimate of mortgage roll rates, cures, and other factors related to the speed of the wind down of the shadow inventory.

 

I am not denying that Buffet does know about these more than most people but I was simply replying to examples quoted above. Just to elaborate.

 

2000 Tech Bubble -  He did not make any macro call. He simply did not buy because he can not predict tech realted business outcome for the next 15-20 years.

 

Returning money - It was not a macro call. He did not find any cheap stuff so he returned  money rather than sitting on cash or buying not so cheap stuff.

 

2008 buying due to keeping some cash being macro call - Buffet always kept some cash above certain limit in Berkshire. He has never been low in cash after getting into the insurance business. Infact he sold JNJ to raise more cash earlier. Clearly being  able to buy cheap in 2008 was not due to any macro call.

 

Can not comment much about him directly shorting US dollar though.

 

 

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An aspect of macro I have found useful is studying LT inflation and deflation cycles.  I haven't tried to make specific projections but have tried to examine what happened in the past during these cycles.  As human behavior has not changed and the aspects of many industries changes slowly, this information can be used to inform investment decisions as to the durability of firms when stressed by economic cycles.  The approach of buying cheap has not changed but the understanding of how firms/securities react to stress is helpful.

 

Packer

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But certain businesses require a sense of macro conditions. In the most recent interview with Charlie Rose, Buffett suggested that months sold in housing might be overstated (he actually just referenced inventories but I am making the leap) and that improved residential spend and home prices would lead to greater than anticipated growth. To make that statement, he probably has some estimate of mortgage roll rates, cures, and other factors related to the speed of the wind down of the shadow inventory.

 

I am not denying that Buffet does know about these more than most people but I was simply replying to examples quoted above. Just to elaborate.

 

2000 Tech Bubble -  He did not make any macro call. He simply did not buy because he can not predict tech realted business outcome for the next 15-20 years.

 

Returning money - It was not a macro call. He did not find any cheap stuff so he returned  money rather than sitting on cash or buying not so cheap stuff.

 

2008 buying due to keeping some cash being macro call - Buffet always kept some cash above certain limit in Berkshire. He has never been low in cash after getting into the insurance business. Infact he sold JNJ to raise more cash earlier. Clearly being  able to buy cheap in 2008 was not due to any macro call.

 

Can not comment much about him directly shorting US dollar though.

 

 

 

Tech bubble - he made a speech in Sun Valley in which he warned of the unsustainability of the bubble.

 

1980 - there is a well known Fortune magazine article in which he explained how cheap markets were.

 

Short USD, long Brazilian Real - a macro call for sure since it cannot be a value decision.

 

2008 - isn't it curious that he could not find anything cheap in the weeks before his "Buy America" call and then he goes all in? I believe it was said that he held only treasuries in his personal account until then.

 

There is no doubt that his macro calls are driven by "value factors" but that does not make them any less than macro calls imo.

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Has anybody else read "What Would Graham Do Now?" ?

 

It's about how one would apply or update the Graham approach / value investing for today's global market. He brings in "Mr. Government" to accompany "Mr. Market". Also gets into more active investing (active like getting involved with the company, sometimes private companies)

 

I'm still fairly early on in it.

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But certain businesses require a sense of macro conditions. In the most recent interview with Charlie Rose, Buffett suggested that months sold in housing might be overstated (he actually just referenced inventories but I am making the leap) and that improved residential spend and home prices would lead to greater than anticipated growth. To make that statement, he probably has some estimate of mortgage roll rates, cures, and other factors related to the speed of the wind down of the shadow inventory.

 

Correct.  Buffett has a better idea of the housing market condition than virtually any fund manager, investor, etc.  He probably has a much better idea than even Prem or George Soros.  Why?  Because that industry is core to some of the businesses he owns, and he gets the numbers weekly...Acme Brick, Benjamin Moore, Clayton Homes, Johns Manville, Jordan's Furniture, Nebraska Furniture Mart, Larson Juhl, RC Wiley, Shaw Industries, Star Furniture, Scott Fetzer (some companies within), Marmon Group (some companies within). 

 

Between all those businesses, as well as the 2nd largest real estate broker in the country (Home Services of America), he's got a better idea of consumer sentiment and changes in housing than probably anyone else in the world!  I don't think he's pumping the tires or raising confidence when he believes housing will turn and unemployment will drop quickly.  Any change in housing and he sees it on his bottom line in real time.  Cheers!

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