Macro Investing Vs. Micro Investing - Which Is Better For You?

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The "fiscal cliff" worries have been finally resolved. Yet, a big cloud of uncertainty is hovering over the stock market. In the past week alone, the SPDR S&P 500 (NYSEMKT: SPY) lost almost 3% of its market value. This finding is especially alarming when you contrast this to the customary 2% increase in market indices in the last two weeks of each calender year.

When you watch your stocks go up or down depending solely on the whims of politicians and global macro-conditions, you suddenly begin to wonder whether fundamental analysis of individual stocks is worth anything anymore. 

Well, you are not the only one.

The shift to macro

Fewer and fewer investors are bothering to pore through corporate reports searching for undervalued stocks and hidden assets.  After all, if a single sudden macro event could practically wipe out a whole year of equity returns together with your research, then why bother?

And as investors grow frustrated with stock picking, they're flocking to mutual funds that specialize in macro investing. These funds focus on anything from commodities to global currencies.

In 2012, through August, investors have pulled $42 billion out of U.S. stock funds and have plowed $13.3 billion into three macro-oriented funds alone: BlackRock Global Allocation Fund, Eaton Vance Global Macro Absolute Return Fund and the Ivy Asset Strategy Fund, according to the Wall Street Journal.

The opponents of macro investing

The Dodd & Graham school of investing does not embrace macro-investing. The famous Peter Lynch from Magellan Fund is often quoted as saying that "Every morning, I spend 5 minutes reading global news, this is 5 minuets too much." He explains that macro-driven investing could be highly lucrative if you catch the early tail of a trend.

The surge in the price of gold, the plummet in natural gas, the crash of the Yen or the bubble in U.S bond prices in the 80's. All of these events did create a windfall of money for investors who joined the party early. In reality, though, very few individual investors actually make it to the party early. Most of the crowd only enjoys a tiny fraction of the trend and usually ends up suffering when this prevailing trend shifts.

Rather than speculate on future macro-events, value investors prefer to buy what is "true and tested": low price to earnings multiple, low price to sales multiple, and a solid track record of dividend payouts. Companies such as Wal-Mart Stores (NYSE: WMT), Microsoft Corporation (NASDAQ: MSFT), and Intel Corporation (NASDAQ: INTC) all exhibit such traits of sustainable businesses trading at significant discounts.

Let's take a closer look at them:

  Forward P/E PEG Operating Margin Cash Per Share Share Buyback Program Div. Yield
MSFT 8.3 1.05 36% 7.85 YES 3.5%
INTC 9 0.8 30% 2.11 YES 4.6%
WMT 12 1.5 6% 2.58 YES 2.4%

As you can easily see in the table above, these market dominating companies are trading at a substantial discount to the average P/E of S&P 500, currently at 15. Not only that, but if you deduct cash from balance sheets, you will find that their respective P/Es are cut by another 15% from here.

All of the companies above employ a share buyback program which ensures that at the end of 2013, there will be fewer shares and more earnings per share.

And just for dessert, you are also compensated with a hefty annual dividend while you wait.

Eat the cake and have it too

Some have tried to combine individual micro-analysis together with macro-driven investing. Goldman Sachs, in a report published in June, advocated a stock selection approach which integrates both approaches into one cohesive approach. When implementing this approach - you first determine the state of the economy (contracting, inflationary, etc.) and only then do you pick the stocks that are most suitable to this macro-environment, based on individual criteria such as low P/E, low P/S and high dividend yield. According to GS, this two- tier approach can lead to outsized equity returns with a lower level of volatility.

The fool's bottom line 

I believe that macro- driven investing is highly tricky. By sticking with the old- fashioned proven core methods of Dodd & Graham value investing, an individual investor can greatly outperform any other asset class and any other method of investing.


shmulikarpf has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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