Be A Macro "Climatologist", Not A "Meteorologist"

Since the financial crisis and Great Recession, many investors have been basing their decisions on macroeconomic factors, something that most value investors might frown upon. But Vitaliy Katsenelson says that while investors shouldn’t pay attention to the daily shifts in macro “weather”, they would be wise to pay attention to macro “climate change” — which, he says, is what Warren Buffett does.

“As an investor you want to spend very little time on forecasting the weather (that is, what the Fed will do with interest rates next month or the rate of growth of the economy),” Katsenelson writes for Institutional Investor. “Weather forecasting, first of all, is not always accurate, but it will certainly consume a lot of time and energy, and the forecasts have a very finite shelf life. … As long as you own companies that can survive rain without catching pneumonia — even a few weeks of rain — weather forecasting is a waste of time. This is what Buffett was implying by saying he didn’t want to be a macro forecaster.”

But, Katsenelson says, investors should pay attention to “climate change” in the financial world — “significant shifts in the global economy that can impact your portfolio”. This, he says, is just what Buffett has done. Over the years, Buffett has warned about the weak dollar causing trade deficit imbalances, and about the use of financial derivatives, he says, adding that Buffett was also acutely aware of the housing bubble. “There is a significant difference between being a meteorologist and a climatologist, but unfortunately in investing, both activities fall under the rubric of macro analysis, and little distinction is made between the two,” Katsenelson concludes.