Macro: The Holy Grail Of Investing
Most of us that have spent their lives in markets know what the macro environment greatly influences shares prices. The market cycles between bull and bear markets and if we could understand their dynamics and make adjustments, it would improve our performance.
The problem is that very few have been able to successfully invest from a macro perspective. The great economist and investors John Maynard Keynes started out as a macro investor when he managed the portfolio for Kings College starting in the 1920s. But he changed to a fundamental investor after reflecting that his market timing macro philosophy had quite simply failed.
In his May 1938 investment report to Kings College, whose endowment he managed, Keynes wrote:
We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle. Credit cycling means in practice selling market leaders on a falling market and buying them on a rising one and…. it needs phenomenal skill to make much out of it. [quoted in Joel Tillinghast, Big Money Thinks Small (2017), pg. 82]
As Warren Buffett quoted him in a letter he wrote to a business associate named F.C. Scott on August 15, 1934 in his 1991 Letter to Shareholders:
As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. . . . One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.
(For more on Keynes transition from macro – what he called “credit cycling” – to fundamental investing, see Justyn Walsh’s excellent Investing With Keynes (2021)).
As a result, most fundamentally oriented investors have given up on macro investing as “too hard” and have focused their attention of buying great and/or cheap stocks.
The problem as I see it is that we are now transitioning to an era in which macro considerations will predominate (see “The Roots of Financial Nihilism”, December 22, 2025).
There are exceptions to the avoidance of macro. One of the most prominent is Howard Marks who devoted his second book, Mastering The Market Cycle (2018), entirely to market cycles. Marks notes that most macro investors have failed and as a result most fundamental investors have given up on it as too hard:
Warren Buffett once told me about his two criteria for a desirable piece of information: it has to be important, and it has to be knowable. Although everyone knows that macro developments play a dominant role in determining the performance of markets these days, macro investors as a whole have shown rather unimpressive results. It’s not that the macro doesn’t matter, but rather that very few people can master it. For most, it’s just not knowable (Mastering The Market Cycle, pg. 10).
But Marks conclusion isn’t to give up on macro. Rather, recognizing how difficult it is, Marks recommends “calibrating” one’s position based on an assessment of where we are in the cycle. That is, he recommends a probabilistic approach rather than an all or nothing one. Much like great poker players don’t put their opponent on one particular hand and bet like they’re certain that that’s the hand he has, but rather put him on a range of possible hands, macro investors should do the same by recognizing the vast complexity of macro:
In my view, the greatest way to optimize the positioning of a portfolio at a given point in time is through deciding what balance it should strike between aggressiveness and defensiveness. And I believe the aggressiveness/defensiveness balance should be adjusted over time in response to changes in the state of the investment environment and where a number of elements stand in their cycles.
The key word is “calibrate”. The amount you have invested, your allocation of capital among the various possibilities, and the riskiness of the things you own should all be calibrated along a continuum that runs from aggressive to defensive…. When we’re getting value cheap, we should be aggressive; when we’re getting value expensive, we should pull back (pg. 12).
Instead of giving up on macro we should used our trained intuition from experience to estimate where we are in the cycle and position our portfolio accordingly, avoiding the extremes of being a permabull or permabear at all times which too many investors are.
My career has been an attempt to integrate my concerns about the macro environment with all the great companies out there creating value in a market that has performed exceptionally for a century (see “The Enduring Investment Principles of Warren Buffett”, January 14, 2025). In the first part of my career, I got it wrong by being too much of a permabear. In this second phase, I am attempting to strike the correct balance between the two.
