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Why Macro Is Important For Stock Pickers

Deiya Pernas, CFA profile picture
Deiya Pernas, CFA


  • Stretched valuations and volatility in the rate markets are a recipe for considering your portfolio allocation.
  • An analytical framework for assessing the macro environment will make one a better bottom-up stock picker.
  • A rise in yields theoretically has a clear effect on valuations but in practice, the correlation is a fuzzy one.

If you invested in Amazon (AMZN) in 2001 with no regard for macro and remained steadfast in your ownership, we are guessing you probably did okay. Even then, we would argue that for you to have maintained conviction in Amazon, you must have had at least a partial macro-opinion. Maybe not of where interest rates are headed but perhaps of how the internet would change the world and how the penetration rate of e-commerce would evolve in the decades ahead. In this piece, we will define what we mean by macro and explain the two dimensions of our macro view: the “inside view” & portfolio positioning. We will conclude by discussing the considerations that affect our current portfolio positioning.

The Inside View

Let’s start with a basic fact about ourselves. We are in the prediction business. Most investors do not freely admit this. Probably because predictions by their nature involve error, probabilities, and uncertainty. Whatever one decides to call it, our job as value investors is to properly forecast a company’s future cash flows. To be more precise, our job is to properly forecast the range of potential cashflow outcomes and the rough shape of the overlaying probability distribution linked to these outcomes. Will we ever get it right? We can say with confidence, probably not. But getting close can work spectacularly well especially when others have a much different viewpoint. Having a good “inside view” of a company is necessarily partially a function of having a good “outside view.” Outside views (or top-down) are usually referred to as macro and inside views (or bottom-up) are called micro. How we define macro: anything that affects a company that is not within the scope of the company management’s control: interest rates, demographics, consumer preferences, investor sentiment, industry changes, etc. Essentially, what are the underlying social, cultural, technological, regulatory, and/or financial realities that allow the company to continue to exist and potentially even thrive? For example, if you are analyzing a fishing company you will want to know how consumer

This article was written by

Deiya Pernas, CFA profile picture
Subscribe here to receive Deiya's monthly stock ideas: https://pernasresearch.com/subscribe/.....Deiya Pernas is a former Deputy Chief Investment Officer of a 3.5 billion dollar investment manager. His area of expertise lies in constructing forward-looking views of equities that go against prevailing market perception. Pernas Research is the company he co-manages with his brother, Dean. Over the past three and five-year periods, they have consistently outperformed market averages. Additional research and their published track record can be found at pernasresearch.com....At Pernas Research, their research philosophy is firmly grounded in the investment strategy they have refined throughout their careers. Their primary focus is on identifying attractively-priced companies that fall into two categories: those with the potential to sustain and expand their future cash flows, and those with cash flows that require improvement but possess a clear path to recovery....Education: University of California, Berkeley | BA Economics....INVESTMENT DISCLAIMERS & INVESTMENT RISKS....Past performance is not necessarily indicative of future results. All investments carry significant risk and all investment decisions of an individual remain the specific responsibility of that individual. There is no guarantee that our research, analysis, and forward-looking price targets will result in profits or that they will not result in a full loss or losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

Well done, very professional.
Is the p/e really at 21.8? I don't believe any main stream metric I read any more. I'm beating the market stock picking and trading with only 30% of my portfolio invested and patiently waiting for reality to reprice this everything bubble.
prudent 576 profile picture
Yes, you can buy a stock and bury your head in the sand, or you can be an active investor, sell a portion when you know the price is too high and buy during a correction. It's hard to look away or ignore what you know is going to happen. Here is the Russell 2000, looking at this what do you think will happen in the short-term? finviz.com/...
The macro view of investing is only good for choosing areas of invextment . The micro view is where you get up close and personal with how the investment would support your investment goals.
j. hughes profile picture
Keep on hedging. As of now the SPY is down 2.49%.
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