All the macro gyan in the world doesn't help us investors make money - only finding good stocks and funds does
12-Jan-2023 •Dhirendra Kumar
There's this funny T-shirt slogan in Hindi, which supposedly started as a notice in some college canteen, "Yaha par gyan na baante, yaha sab gyani hai." Perhaps nowhere is this more true than in investing. Over decades of thinking, talking and listening about investing, I'm still continually amazed by the sheer amount of conversation that revolves around esoteric economic factors that the investor should actually not pay any attention to. Every day, analysts, economists, investment managers and other sundry talking heads appear on TV channels and newspapers and now social media, talk endlessly about interest rates, the fiscal situation, inflation rates, demographic shifts, oil prices, trade flows, quantitative easing or tightening and a lot more in the same vein.
Somehow, all this is supposed to serve as inputs to yours and mine decision-making process about our own investments. The reality is that all this is almost completely useless for you and me as far as making actual investment decisions about what stocks to buy and what stocks to not buy. Actually, all this gyan that is distributed is not just useless, but worse than useless - it actually harms you as an investor. It harms you by distracting you, by taking attention away from the 'X Factor', which is what really matters in your quest to generate wealth from your stock investment.
So what is this 'X Factor'? It's the simplest and most straightforward idea in the world: understand your own financial needs and constraints, and depending on which you prefer, work on identifying good stocks and good funds that will fit your needs. Investing is about investments. A discussion about actual investing must not be about these macro gyan factors, none of which are under your control. It should be about revenues, margins, profits, market shares, product pipelines, management quality and all those things that actually decide the money-making potential of a company and therefore the wealth generated by the investors. The job of the investor is to not make economic predictions but to identify suitable investments. Investing is a bottom-up activity, not a top-down one.
For good reason. None of these gyan factors are under your control. What the RBI or the Fed does to interest rates or what calamity befalls in some geopolitical arena is outside your ambit. Common sense dictates that it's better to focus on what one can control. You have control over when you invest, what you invest in, what price you invest at and whether you invest at all. You can control whether you invest it in a great excitement in some bubble, or whether you invest systematically and gradually. You also have complete control over the money you are going to invest in.
A great reason for why focusing on companies is better than on the gyan factors is that the former tends to be fact-based while the latter are opinion-based. "It's much easier to BS at the macro level than it is to BS at the micro level." That's Nassim Nicholas Taleb (obviously!) explaining why bottom-up is way better than top-down. Bottom-up is reality while top-down could just be empty talk, and usually is. You make money by doing the right things at a micro-level, by choosing the right stocks or funds.
Do note that I'm not claiming that larger economic factors do not matter - of course they do. What I am saying is that you and I gain no advantage from trying to take those factors as inputs into our own decision making. There's no point in doing that. Let's just get the basics right, the larger issues will take care of themselves. Or not, it doesn't matter much.
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