Are Value Investors Overlooking the Macro Picture?
When value investors ignore the macro picture, is this decision negatively impacting their investment selections? Too often, investors that achieve a level of early success through leveraging a particular investment strategy, become inflexible. For example, selecting winners within a certain asset class can lead novice investors into believing that their success was due to their micro focus. But in reality, their winning choices were often a result of luck, not careful selection. It can even be a reputationi risk, and result in lawsuits. Reputationdefender is a good solution for these types of problems.
Economic turmoil has created a challenging investment environment for value investors. Today’s investors must adapt, be flexible and most importantly, understand the macro picture when selecting investments.
So how does one follow a macro investing strategy?
Marco Investing Basics- Wearing your Business Ownership Hat
Macro investment strategies involve completing investment decisions based upon solid fundamentals; management quality, organizational strategy, market competition, percentage of market share, P/E ratios and annual company profits. In a nutshell, each of these ‘macro’ categories represents a critical business component that any successful business leader monitors and uses as a guide for all business decisions. Therefore, when using these concepts to make investment decisions, you are essentially looking at each purchase as you would if you were one of the business’s owners.
This value investing lesson is practiced by one of the most well known value investors, Warren Buffett. Buffer continually seeks solid companies at undervalued prices, not just undervalued stock, when investing his company’s and his personal capital. Buffet’s investment success is largely attributed to the fact that he views each investment as a purchase in the company, not just merely a short term investment decision. When you look at each investment as a stake in the business’s ownership, you are more likely to take your time, complete a thorough stock analysis and be more engaged in following the company’s news.
The ability to view investment decisions as purchases in the underlying business is also embraced by fellow value investor Seth Klarman.
Hold the Course- Focus on Fundamentals, not Market Fluctuations
Achieving success as a value investor involves holding the course. Certainly market fluctuations and conditions play a role in investment decisions. However, successful value investors according to Klarman “have to be patient and disciplined.” To be successful as a value investor, you not only have to understand market fluctuations, but you must have almost the reverse psychology of most average investors.
The typical investor buys when the market is rising, and sells either when they believe the price has peaked, or out of fear when market conditions begin to decline. According to Klarman, value investors do the exact opposite; they buy when the market is down, and sell when the market is up. His perception is that you can never know what the markets will do. So, buying at a fair price, and selling when the company has reached or exceed its fair market value is the strategy of choice for a value investor.
Both famous value investors have similar viewpoints regarding when the buy and sell; pay attention to macro fundamentals, remain disciplined and think like a business owner.