Latest Memo From Howard Marks: Thinking About Macro

Regular readers of my memos know that Oaktree and I approach macro forecasts with a high degree of skepticism. In fact, one of the six tenets of Oaktree’s investment philosophy states flatly that we don’t base our investment decisions on macro forecasts. Oaktree doesn’t employ any economists, and we rarely invite them to our offices to share their views.

The reason for this is simple: to use Buffett’s terminology, we’re convinced the macro future isn’t knowable. Or, rather, macro forecasting is another area where – as with investing in general – it’s easy to be as right as the consensus, but very hard to be more right. Consensus forecasts provide no advantage; it’s only from being more right than others – from having a knowledge advantage – that investors can expect to dependably earn above average returns.

Many investors think their job requires them to develop a macro outlook and invest according to its dictates. Successful stock pickers or real estate buyers often make pronouncements regarding the macro outlook, even in the absence of evidence linking their investment success to accurate macro forecasts. Nonetheless, since macro developments are so influential, many people think it’s downright irresponsible to ignore them when investing. Yet:

• Most macro forecasts are likely to turn out to be either (a) unhelpful consensus expectations or (b) non-consensus forecasts that are rarely right.
• I can count on one hand the investors I know who successfully base their decisions on macro forecasts. The rest invest from the bottom up, one investment at a time. They buy when they think they’ve found bargains and sell things they consider overpriced – mostly without reference to the macro outlook.
• It may be hard to admit – to yourself or to others – that you don’t know what the macro future holds, but in areas entailing great uncertainty, agnosticism is probably wiser than self-delusion.

But why take my word for it? How about these authoritative views?

 

It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.– Amos Tversky

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain

That brings me to the subject of forecasters’ track records, or rather the lack thereof. Back in the 1970s, an elder told me, “an economist is a portfolio manager who never marks to market,” and that description still seems highly appropriate. Have you ever heard an economist or macro strategist say, “I think there’ll be a recession soon (and xx% of my recession predictions have turned out to be right within a year)”? Would anyone invest with an investment manager who didn’t publish a track record? Why follow macro forecasters who don’t disclose theirs?

Finally, I want to point out that the same comments apply to most investors. You rarely hear them say they have no idea what the macro future holds or beg off from expressing opinions. One of the most important requirements for success in investing is self-assessment. What are your strengths and weaknesses? If you invest on the basis of your macro views, how often have they helped? Is it something you should keep doing or discontinue?