The ability to successfully predict large macro-economic trends can be lucrative in speeding up the wealth-building process for individual investors. For instance, if you were able to correctly anticipate the rise in oil prices over the past thirteen years, it did not really matter whether you picked Exxon (NYSE:XOM), Chevron (NYSE:CVX), or ConocoPhillips (NYSE:COP). Whichever company you picked, you were set to make a good chunk of change in a relatively short matter of time.
The question is: What role should more pedestrian insights play in the investment selection process, such as general observations like "health care will grow in the United States in the coming years" or "nuclear energy is set to take off in the United States over the next two decades." Or maybe you read Peter Drucker's predictions about a permanent squeeze on the global middle class as the world continues to segregate itself into high-paid knowledge workers and lower paid manual workers (the thrust of Drucker's thesis is that the notion of a blue-collar middle class will become almost completely eviscerated because automation and technological advances will eliminate most forms of physical labor, with the exception of particular trades such as plumbers, electricians, etc.).
So if you believe the middle-class is shrinking, it can makes things easier for you to avoid altogether the companies that rely upon selling goods and services to the $80,000-$130,000 household income demographic. Personally, you could not pay me to commit to hold Cheesecake Factory (NASDAQ:CAKE) or Darden Restaurants (NYSE:DRI) stock for twenty years.
Analysts have rosy five year predictions for both companies, and international expansion and stock buybacks can offset stagnant revenue growth in the United States, but on a very long term basis, I would not want to have a meaningful portion of my portfolio relying on growth from Red Lobster, Olive Garden, Longhorn Steakhouse or The Cheesecake Factory to fulfill my growth expectations. Mid-tier casual dining will likely face permanent headwinds in the form of a shrinking middle class for some time to come. Both companies could very well make fine long-term investments, but I prefer making investments when I believe the odds are stacked in my favor (I'm not interested in finding the success stocks that thrive despite enduring nasty headwinds).
Of course, that still leaves us with low end and high end investments to consider. A company like McDonalds (NYSE:MCD) has pretty much bought itself a permanent client base. When you're feeling pretty strapped, that $1 menu can be a pretty good financial option for households looking to eat out on a limited budget. McDonalds has a good system in place because they typically collect 4% of monthly gross sales (plus a certain percentage of rent from each franchisee location) that allows the company to generate enormous cash flow. When you anticipate that a good chunk of the population will be permanently strapped, you can add a nice bump to your investment returns by owning low-cost producers in the industry, whether that be Wal-Mart (NYSE:WMT) in retail, Wells Fargo (NYSE:WFC) when it comes to acquiring a deposit base, or Owens & Minor (NYSE:OMI) when it comes to supply chain management in the healthcare industry.
Similarly, you can see how economic headwinds and tailwinds affect high-end specialty retailers like Tiffany's (NYSE:TIF). If you review Tiffany's recent financial documents, you will see that the company has been doing quite fine lately selling diamonds to its high-end customers. However, their products aimed at the middle-class have been feeling a substantial squeeze. Silver jewelry priced below $400 has been declining by double digits, and analysts are predicting that demand will fall by 10-20% for this market segment in the coming years (the bad news for Tiffany shareholders is that this segment accounts for a quarter of Tiffany's revenue, but the good news is that falling silver prices have mitigated the weak performance of the mid-tier silver jewelry division).
Most of the time, I encourage investors to consider stock purchases in the strongest blue-chip stocks that you can find. One of the reasons why I do this is because the best companies in the world have strategies that adjust to macroeconomic forces. I'll use Procter & Gamble (NYSE:PG) for an example. If you read the company's 2011 Annual Report, you will see that the company had begun transforming its Gillette brand to remove most mid-tier razors from its offerings. The company's focus is on the folks who want to spend $2-$5 on razors and folks who want to spend more than $20 on shaving gear. The company has greatly decreased its mid-tier shaving options because it perceived diminishing demand for $8-$14 options. These kinds of tweaks and adjustments are par for the course with these kinds of companies. That's one of the reasons why I continue to enjoy holding a company like Procter & Gamble in my portfolio, even though the company is modestly overvalued based on historical metrics.
In short, the perception of a negative headwind may lead me to avoid some investments altogether. Life and business is hard enough as it is, and I do not feel any pressure to buy shares of company that has to deal with permanent questions about the stability of demand for its products. I don't like making things any harder for myself than I have to. That's why I like to stick with blue-chips that have long track records of success, and then pay a rational price for a company that stands to benefit from a pleasant tailwind, either demographically or from beneficial changes in the industry. There's no reason to make things any harder for yourself than necessary.