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There is always a macro-something to worry about – get over it

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Right now people seem very worried about inflation, the cost of living crisis, central banks raising interest rates and banks going bust. Then there is the potential for escalating war in Ukraine or a new one around Taiwan. These are concerns, but they shouldn’t stop us from investing.

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Sure, if war (or blockade) with China came to pass then we are in deep trouble, but history shows us that fear of this kind is ever-present, but the reality rarely comes to pass. For example, in the 1950s many people missed out on a rising equity market because they thought nuclear war was just around the corner or that a 1930s-style depression was to descend again.  And again in the 1960s.

As for the current economic travails, I see them as normal – just par for the course in a normal economic progression.

Around the turn of the year I was looking for signs of a third major economic mess-up (following Covid and then “transitory” inflation from over-stimulus), but as the weeks passed I noticed that the Holmesian dogs were not barking: unemployment was not rising much, if at all; not many companies were going bust; the wage-price “spiral” got stuck at around 5-6%, etc. Less a spiral, more a bit of a jump to a (temporary) plateau.

And now that gas and oil prices are dramatically down on a year ago we will see headline inflation fall way below core inflation – those headlines will ultimately bring down core inflation.

Peter Lynch once said there is “always something to worry about and the key organ in your body in the stock market is your stomach. It’s not the brain. If you can add 8 and 8 and get reasonably close to 16, that’s the only level of math you need to know. You don’t know to need the area under the curve. Remember that quadratic equation and integral calculus and the area under the curve? Whoever cared what was under the damn curve? But you had to study this. You don’t need this in the stock market. So, all you have to know is that it’s always going to be scary, there’s always going to be something to worry about. You just have to forget all about that”. (Peter Lynch 8 October 1994 Lecture to the National Press Club)

So what should you do instead of fretting over the macro-picture and the maths? “Cut it all out and own good companies” (Peter Lynch).

There you have it: understand good companies; ones that will survive, and even thrive, in normal macro vicissitudes.

Peter Lynch recalls from his lifetime of investing a few of the things Cassandras warned us about:

“ when oil went from $4 to $40 and it was going to go to $100 and we were going to have a depression? Well, about three years later, the same experts, now higher paid, oil is now at $10 and  they said it was headed for $4 and we’re going to have a depression……

…..And then the Japanese, remember how the Japanese were going to own the world, and we were going to have a depression? Remember that one? And then about two years later, we were all worried about Japan collapsing. This is the most absurd thing I’ve ever heard. This is a country with a 20% savings rate, incredible work force, incredible productivity, and people were saying we’re going to have a depression because Japan is going to collapse. You know, it’s unbelievable….

…The LDC {Lesser Developed Countries] debt. Remember the LDC debt? Remember that one? All these countries, Chase [Bank] had lent their net worth to Brazil, Chile, Peru and all these other countries. They were not going to pay it back and we were going to have a depression. It always ends in we’re going to have a depression, or the Great Depression, we’re going to have the Great Depression. I never could quite understand that adjective in front of Depression. The Great Depression or the Big One is coming”  (Peter Lynch 8 October 1994 Lecture to the National Press Club)

So, the general rule is keep being invested despite the macro worries. But only in companies you thorough understand, that have sound business models and managers and which are financially robust.

But remember all the while the adage “young people learn the rules; old people learn the exceptions”.  There will be one of two exceptions in the next decade or two when a macro-event is anticipated to be so big that you need to get ahead of the crowd and go ultra safe with your portfolio, say to 40% cash with the other 60% in particularly secure companies.

I hope you have a good financial advisor – or you are really keeping up with your reading – when those times come.

Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)

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