Co/Report
A few intelligent things
“There’s a way to do it better—find it.” —Thomas Edison
February came to a close last week. After a strong first month of the year, the S&P 500 lost about 2.6% in February, and the Nasdaq lost about 1.1%.
March got off to a better start (if you’re long), with all the major indices up close to 2% after the first three trading days of the month.
There is plenty to worry about in the macroeconomy. There always is.
And there are always more people telling one what to worry about than one has time to listen to.
But it’s hard to trade or invest based on macroeconomics, especially since things can change quickly. However, one can study the macro picture to help identify potential risks, which can help guide one’s portfolio decisions. As investor Seth Klarman has described it: “We worry top-down, but we invest bottom-up.”
David Einhorn, who made a brief media appearance this past week, is another top-down worrier that is also a bottom-up investor. In October 2021, he worried about inflation when most others had concluded it would be “transitory.” As described in the Greenlight Capital Q3 2021 Letter to Investors:
Over the summer, the Federal Reserve characterized inflation as “transitory.” As inflation has refused to resolve itself quickly and on its own, Fed Chair Powell revised his description to “frustrating.” But why should he feel frustrated? It’s not like he has done his best to fight inflation without success; he hasn’t lifted a finger to fight inflation. Instead, he has maintained a policy designed to create inflation. As a result, inflation is here and it appears poised to worsen.
Inflation did worsen and, after a stretch of underperformance, Greenlight was up over 36% in 2022. Their big-picture worries about interest rates, inflation, and valuations drove them to individual positions that paid off in a year when most investors lost money.
Einhorn still thinks inflation is likely to stay stubbornly high, and that the major stock market indices are too highly valued to produce attractive returns from current levels.
We have no idea if he’ll be right again. And while most individual investors can’t (and shouldn’t) manage a portfolio of short positions like Greenlight or other funds manage, they can emulate what they do on their long positions: Find companies that can manage the risks and uncertainties of our current macroeconomic backdrop, buy them at reasonable prices, and hold them for a long time.
“Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.” —Charlie Munger
“Just give me a few decent things to do and I’ll ignore the rest of the world.” —Charlie Munger
“I have seen men of experience take months to reach a decision on a long-term commitment. But once it is made there is no longer any place for the feverish attention to day-to-day developments which are the trader’s life blood. Even those who decide to trade may be helped if they adopt the rule of never buying anything they would not be happy to hold indefinitely. Parting is such sweet sorrow when one does it at a handsome profit.” —Thomas Phelps (“100 to 1 in the Stock Market”)
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