When Macro Stuff Actually Matters

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Jason’s Random Words

I’ve been thinking more about macro stuff lately.

Now, don’t get me wrong: If you didn’t watch or listen to this week’s livestream show, you may not remember that part of my day job is to pay attention to and think about macro stuff. I also agree in general with Peter Lynch’s assertion that if you spend 13 minutes a year on macro, you’ve spent 10 minutes more than you should.

I also find a lot of the weird and obscure macro stuff interesting, if unhelpful for individual investors most of the time. The simple truth is that an investor who dollar cost averages into a diversified portfolio of stocks, or low-cost index-based ETFs for multiple decades, will create a significant amount of wealth for themselves.

When that same investor also allocates wealth they will need to fund their life in the next three to five years in cash and bonds or other stable, cash-generating assets, they have a portfolio that’s macro-proof and will generally let them benefit from the macro stuff that makes markets volatile.

Not owning stocks with money you’ll need in the short term, and being a net buyer of stocks across all markets with money you won’t need for decades, makes macro your friend more than your enemy.

Sometimes that’s not enough. There are times when understanding the macro environment, or specific, sometimes wonky parts of it, are critically important to investing success. As our good friend, muse, and sometimes YouTube collaborator Tyler Crowe recently described, missing out on the macro picture can result in a permanent loss of capital. (If you like Tyler’s work, you can get a discount on his fancy paid subscription service here).

If you’re investing in commodities companies, or large, established companies with significant exposure to macroeconomic conditions, the degree of difficulty to picking a winning investment is higher. As Tyler described in the post linked above, even picking the best-capitalized, strongest operator in a particular sector is no promise of profits.

Knowing when to say when

So what’s an investor to do? As we discussed on the podcast episode that will come out on Wednesday, it’s perfectly reasonable to just don’t fish in unfamiliar waters. You really don’t have to invest in every sector if you’re picking individual stocks, especially if you’re just doing it because you think you need exposure to that sector. This is exactly where ETFs can help give you exposure to industries without having to pick individual winners.

Iron, oil, and other stuff

But if you are going to invest in a steelmaker, lithium miner, oil producer, or chocolate maker, it’s critically important that you know the industry, understand commodity cycles, pricing, who are the big players, and how to appropriately evaluate the business prospects, operations, balance sheet, and valuation of the companies you are considering.

For instance, Transocean (RIG) — the company Tyler referenced in his recent post — traded for around 12 times earnings in 2014, which is generally considered a cheap valuation for an industry leader. The problem: 2014 was near the peak of its earnings — ever. Since then, the company has lost money almost every year, and investors have lost 90% of their investment.

We can use lithium giant Albemarle (ALB) as a more recent example. Plenty of investors saw its stock price sliding from the 2022 highs into a single-digit earnings multiple to start 2023, and just assume that the explosion in EV sales, batteries for energy storage, and the electrification of everything would be a huge positive trend and make it a can’t miss investment.

Well. The stock has lost more than 2/3 of its value since the beginning of 2023, as lithium prices have collapsed and stayed down on both softening near-term demand and significant oversupply for that current demand. Albemarle’s earnings have collapsed, pushing its P/E ratio above 34, even as its stock price has fallen.

If you don’t follow commodity markets, and understand how macro events can affect the companies that operate in them, you can get burned quickly.

Pay attention or ignore macro; just make sure to do this

The point: Most of the time, macro really doesn’t matter, so long as you have your asset allocation for near-term money out of stocks. But if you’re fishing in macro-heavy waters, make sure you know what you’re getting into, and if you don’t, be sure you’re not risking money you can’t afford to lose. Because you probably will.

You can do it,

Jason