Scene: Dinner, Monday night
Dramatis Personae: party of 8, including Fed staffer, Fund manager, VC, Trader, Media, et. al. (Notably absent were economists of any flavor, though some were present for pre-dinner drinks).
Discussion: Post-mortem of Bernanke Q&A at press conference, how & when the Fed unwinds, whether the economy is strong enough to withstand the taper, Just how screwed is China? and calls for the return of Lakshman Achuthan.
Investment Conclusion: Liquidate everything! Run! Hide!
Every now and again, a phrase catches my ear that perfectly sums up some phenomena. Recently, that phrase has been “Macro Tourist.” I do not recall exactly when I first heard it (nor who can lay claim to inventing it) but I suspect I first noticed it in this Mark Dow post from last summer. Dow was looking at why so many large and well known hedge funds were stinking the joint up. The obvious answer was their leaving a core competency (Value, Activist, Arbitrage, etc.) and jumping into the global Macro style of investing, despite a lack of experience and expertise in that arena. (You will find a short list of Macro Tourist themed articles at the end of this post).
What is the relationship between the Macro Tourists and last night’s dinner? As the conversation turned to all things Fed, Global, and economic, I found myself wanting to liquidate all of our equities and hide in a cave.
Looking at the conversation in the cool light of the morning dawn — consuming French Roast instead of Italian Barolo — presented a very different perspective. There was nothing said last night that was not true last month or last quarter or last year. Sure, we may be looking at a 1% print for Q2; we also have seen an inevitable spike up in rates. But the overall discussion could just have easily been had in 2010 or 2011 with the same resulting desire to raise cash and hide.
This emotional reaction to narrative (such as the above) is the source of many an investor’s biggest problem. Giving up on their plan, allowing the tale to trump the data, getting pulled into an eddy away from their comfort zone can become an expensive indulgence. I consider myself fortunate to have developed enough self-awareness over the years to recognize and contextualize these inputs for what they are: Transitory, compelling, ruinous bedtime stories.
Why ruinous? Experience teaches that the Macro approach to investing can be very problematic for many people. The first problem is the narrative form, discussed above. But the bigger issue lay with price. How much of the Macro story is truly a Variant Perception? What was discussed at dinner that was not well known, or at least understood by key players? Most importantly, how much of this has already been acted on in the market?
Variant Perception is quite a rarity. It happens every now and again, but that truly unique and insightful analysis not understood or even known to the investing world is not a typical event. When it gets made, when it happens before it being widely recognized and then acted upon, it presents an enormous possibility for the patient investor. Tremendous fortunes and made and lost on these beautiful and rare insights.
When considering Macro Tourism as an investing approach, ask yourself these simple questions: Is this known? Has it already been acted on? Is this trade late to the party? How early might it be, and how upside are you willing to get before it begins to pay off?
Search for the rare bird, but do not be confused by the common street pigeon . . . lest you become one.
Other articles about “Macro Tourists”:
• John Paulson (Motley Fool)
• Daniel Loeb (Guru Focus)
• Kyle Bass (Business Insider)
• Bill Ackman (Guru Focus)
• David Einhorn (Reuters)
And too many others to note . . .
Folks like Gorge Soros and Jim Rogers have been playing in that sand box for so long, we need to call them macro residents . . .