Article Reviews, Value Investing

Incorporate Macroeconomic Conditions in Value Investing

Came across two video snippets of an interview with Howard Marks from Oaktree Capital Management. Buffett had famously shared that he doesn’t consider macroeconomics when making his investment decisions. Howard Marks in the videos however advocated keeping tabs on the “market’s temperature” and adjusting one’s aggressiveness based on that.

Why You Should Look at Macroeconomics

  • It is unrealistic and hubristic to say “I don’t care about what’s happening in the world, I know a cheap stock when I see one.”
  • Sometimes the investing world is highly hospitable when prices are depressed, and sometimes it is very hostile when prices are elevated.
    • It is much easier to make money when the world is depressed. When there is a general increase in market prices, you have the tailwind in your favor.
    • If you buy a cheap stock when the market is high, and the market being high is followed by a general decline in prices, you will have to swim against the tide.
  • If you don’t follow the pendulum and understand the cycle, that implies that you always invest as much money, as aggressively. I have been around too long to think that a good investment is always equally good, all the time, regardless of the climate.

Adjust Your Aggressiveness Based on the Market Climate

  • Sometimes we want to be at the very top of the capital structure. That may be where the best bargains are, or the macro environment is hurting and we don’t want to live with macro uncertainty.
  • When the environment seems less treacherous, maybe we will drop down to the 2nd or 3rd level of the balance sheet.
  • These adjustments are worth making. You should adjust your tactics (offense, defense), based on conditions in your environment.




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