Is your money sub­ject to the tra­vails of a macro tourist?

The Washington Post Sunday - - BUSINESS - Barry Ritholtz

How’s your macro?

Not too good? Ter­ri­ble? Un­sure what that even means?

Let’s start here: Macro refers to the large geopo­lit­i­cal mo­ments, and the nat­u­ral and man­made dis­as­ters, that some in­vestors track as po­ten­tial mar­ket mov­ing events. Large eco­nomic trends or re­ver­sals, diplo­matic break­throughs, po­lit­i­cal crises and even war are all macro events. Think: a tsunami that knocks out a Ja­panese nu­clear power plant; the Arab Spring; the sys­temic fail­ure of the credit mar­kets in 2008-2009; Rus­sia’s an­nex­a­tion of Crimea. The on­go­ing Greek saga that has Europe on edge is all too macro.

Hang­ing on ev­ery twist and turn of the head­lines are a group of folks we call “macro tourists.” They are a ter­rific source of chat­ter at any cock­tail party— such as “Tsipras may have just doomed the Greeks for the next decade.”

Why does this mat­ter to in­vestors? For two rea­sons: First, macro tourists are ev­ery­where; and sec­ond, they seem to be

ter­ri­ble stew­ards of your cap­i­tal.

They re­mind me of the visi­tors to New York in the 1980s who were fleeced on the streets by card sharps run­ning the Three-card Monte con. Macro tourists lose money by mak­ing sim­i­larly ill-ad­vised bets where the odds are de­cid­edly not in their fa­vor.

Con­sider the in­ter­na­tional news flow in re­cent weeks and what many peo­ple think it could mean for the global econ­omy:

China’s Shang­hai Stock Ex­change Com­pos­ite had a boom and bust this year: up 115 per­cent from Jan. 1 to its peak in June; then a 40 per­cent crash in a month. Still, Chi­nese mar­kets are still up 83 per­cent over one year ago. An ex­tra­or­di­nary in­ter­ven­tion by the Chi­nese gov­ern­ment cre­ated a bounce; who knows how long it will last?

The Sisyphean labors of Greek debt are next. Will they/ won’t they leave the euro? Who knows? At this point, most of us are suf­fer­ing from debt drama ex­haus­tion.

Then there’s Iran: Af­ter 13 years of sanc­tions over its nu­clear am­bi­tions, an im­passe has been breached. With the help of other coun­tries, no­tably Rus­sia, an enor­mous, game-chang­ing treaty has been reached.

And let’s not for­get Cuba and our newly reestab­lished diplo­matic re­la­tions (even as U.S. re­la­tions with China are de­te­ri­o­rat­ing).

Mar­ket-mov­ing head­lines would seemto present an op­por­tu­nity to cap­i­tal­ize on the po­ten­tial volatil­ity that of­ten fol­lows.

But here’s the big risk for in­vestors who try to game the head­lines: Fig­ur­ing out what just hap­pened is hard enough; the macro in­vestor must guess at what’s ahead— out­comes for the near and far fu­ture as well as the mar­ket re­ac­tion to those out­comes.

Psy­chol­o­gists would de­scribe it as cre­at­ing a “vari­ant per­cep­tion,” which re­quires you to imag­ine what the crowd thinks it knows, what it owns and where it is prob­a­bly wrong. De­ter­min­ing when the crowd will fig­ure out that it’s wrong, and what it is likely to do about it, is even more dif­fi­cult. Oh, then you have to get the tim­ing of it all pre­cisely right.

You might imag­ine that these big head­lines would make this process easy on the macro in­vestors. An­tic­i­pate the next big story, po­si­tion your­self against the wrong-lean­ing crowd ahead of time and boom! Easy money!

Only it is not so easy. De­spite the head­lines, mar­kets have mostly ig­nored the macro. Sure, we have seen some strong moves up and down and next-day re­ver­sals— but more than half­way through the year, the mar­ket has been stuck in a sur­pris­ingly tight range. Con­sider this data point: It has been 645 days since the S&P 500 saw even a 10 per­cent draw­down.

What does this mean to the av­er­age in­vestor? Be­fore be­com­ing a “macro tourist” fool­ishly trad­ing on head­lines, con­sider these truths:

News is fac­tored into stock prices by the time it’s on the front page. These sto­ries all de­velop over time. The head­lines tend not to come out of the blue but are the re­sult of in­cre­men­tal events over months and years.

Head­lines don’t drive mar­kets. Prof­its and val­u­a­tions do. These geopo­lit­i­cal events make for big splashy head­lines, but ul­ti­mately have lit­tle af­fect on what mat­ters to stock prices: cor­po­rate prof­its. Earn­ings are a fun­da­men­tal driver of com­pany val­u­a­tions and there­fore eq­uity re­turns.

Guess­ing isn’t in­vest­ing: Mak­ing big bets on out­comes that are bi­nary— i.e., a 50-50 prob­a­bil­ity— is not in­vest­ing, it’s spec­u­la­tion.

It’s no won­der the macro tourists, both pro­fes­sional man­ager and am­a­teur in­vestor alike, have been for the most part un­suc­cess­ful.

Birinyi As­so­ci­ates cre­ates one ofmy fa­vorite re­search pieces each year. Las­zlo Birinyi and his staff col­lect main­stream news ar­ti­cles and com­pile them all in an an­nual re­view. See­ing these head­lines, all omi­nous warn­ings of ter­ri­ble things to come— with their dates, af­ter the fact— is down­right hi­lar­i­ous.

Add to that the fun­da­men­tal misun­der­stand­ing of risk that is preva­lent among you hu­mans. As it turns out, you worry about all the wrong things. You stress over the fis­cal cliff and the se­quester and Greece— all things over which you have no con­trol and no way to fig­ure out how the chips may fall if they do or don’t oc­cur. Talk about wasted ef­fort.

In­stead, why not think about what you can con­trol? Such as hav­ing a plan, re­duc­ing your costs, low­er­ing your turnover and pay­ing less in short-term cap­i­tal gains taxes? These are things you can do, and the im­pact will be much more mean­ing­ful to your long-term re­turns than whether the Greek cur­rency is the euro or the drachma.

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