In general, I tend not to go in for macro themes. Why? I tend to get them wrong, and I think most investors also get them wrong, or at least, don’t get them right consistently.
I do have one macro theme, and it has served me well for a long time, though not over the past two years. I was using the theme as early as 2000, but finally articulated it in 2006.
At that time, I was running my equity strategy for my employer, as well as in my personal account. They used it for their profit sharing plan and endowment. They liked it because it was different from what the firm did to make money, which was mostly off of financial companies, both public and private. They didn’t want employees to worry that their accrued profit sharing bonuses would be in jeopardy if the firm’s ordinary businesses got into trouble. In general, a good idea.
At the end of the year, I needed to give a presentation to all of the employees on how I had been managing their money. Because my strategies had been working well, it would be an easy presentation to make… but as I looked at the prior year presentation, I felt that I needed to say more. It was at that moment that the macro theme that i had been working with became clear to me, and I called it: Our Growing World.
The idea is this: in a post-Cold War world where most economies have accepted the basic idea of Capitalism to varying degrees, there should be growth, and that growth should create a growing middle class globally. This middle class would be less well-off than what we presently see in America and Western Europe, at least not initially, but would manifest itself in a lot of demand for food, energy, and a variety of commodities and machinery as the middle class grew.
Now, I never committed everything to this theme, ever. Maybe one-third of the portfolio was influenced by it, on averaged. Most of what I do was and still is more influenced by my industry models, and by bottom-up stock-picking.
That said, the theme has a cyclical bias, and cyclicals have been kicked lately. I still think the theme is valid, but will have to wait for overinvestment and overproduction in certain industries to get rationalized globally. Were this only a US problem, it might be easier to deal with because we’re far more willing to let things fail, and let the bankruptcy process sort these matters out. Governments in the rest of the world tend to interfere more, particularly if it is to protect a company that is a “national champion.”
But the rationalization will take place, and so until then in cyclical industries I try to own financially strong companies that are cheap. They will survive until the cycle turns, and make good money after that. That said, the billion dollar question remains — when will the cycle turn?
More next time, when I write about my industry model.