More Thoughts on Macro Investing

Tren Griffin followed up on our discussion with a post that has a series of quotes from value investing gurus claiming that macro forecasting is a folly.  Before I explain why I think this is misleading, here are a few of the quotes:

“Gigantic macroeconomic predictions are something I’ve never made any money on, and neither has Warren.” – Charlie Munger

“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.” – Warren Buffett

“The last time I made any market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter based on the fact that I had one month’s experience.  Since then I have given up making predictions.” – Ben Graham

I think these quotes are somewhat misleading.  First of all, Ben Graham, the father of value investing explained the growing difficulty of value investing before his death:

“In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook “Graham and Dodd” was first published; but the situation has changed a great deal since then.”

And while Munger and Buffett give the appearance of being pure value investors, they’re much more than that.  In fact, in recent years Buffett has made it quite clear that a core component of his entire approach is a bullish macro forecast.  In the depths of the crisis Buffett wrote an op-ed saying “buy American, I am”:

“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

That is an obvious bullish macro forecast!  Yes, Mr. Buffett gets more granular in his specific investment choices, but one of the core underlying principles of the Buffett approach is a bullish long-term macro forecast.  He isn’t neutral on the long-term.  He isn’t hedging.  He is making an explicit bullish macro forecast.

Of course, this isn’t a one off comment for Buffett.  Through his career he’s repeatedly stated his bullish macro forecast on the American economy.  For instance, in his 2011 annual letter he described how the American system seems to be extremely resilient and that America’s “best days lie ahead”:

“Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born (see chart above). The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.   We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

Of course, Buffett thinks he can benefit from this long-term macro forecast by picking superior companies within the US economy.  This makes him something different than a pure macro investor.  But he doesn’t recommend this approach for most people.  In fact, he recommends a simple inactive macro approach of buying into this long-term macro bullish forecast by simply buying an index fund:

“A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”

So, it’s clear that Buffett, Munger and Graham are wrong to imply that they don’t recommend macro or macro forecasting.  And it’s extremely misleading to imply that Buffett and Munger have never made money from their macro forecasts.  Had Buffett been less bearish on America in the long-run he most certainly wouldn’t be as wealthy as he is today.  But what’s even stranger about these comments is that people seem to think that buying an index fund or being bullish on the long-term isn’t an explicit macro forecast.  It most certainly is.

Granted, there are lots of ways to skin the macro cat.  You can be much more active and tactical like Ray Dalio or you can just buy into this very simple bullish macro view by purchasing an index fund as Buffett recommends.  Both are different ways of making macro bets.  And as Graham made clear before his death, the world is changing.  And macro matters more than ever whether you’re actively trying to forecast near-term events or passively trying to forecast long-term events.

Edited: Graham didn’t reject value investing.  He did, however, express his concern over its growing difficulty.