The subject line wasn’t long enough, or my title would have been: Is it possible to generate good long-term returns as an individual investor using a strategy that is not equity “value investing” (which I define, especially for an individual investor, as finding small cap names or special situations that are somehow mispriced)? Now, I know it’s already extremely difficult to do well buying individual stocks, so value investing is no walk in the park either. I’m just curious whether certain persons/people not working in a professional finance institution have found a way to use “global macro” from a personal account perspective and actually make money (feel free to substitute in other strategies). I don’t mean getting on lucky streaks, but actually having a solid reason behind every move and earning 10%+ returns on average. The obstacles to this that I see are that it’s tough to find a margin of safety outside of stocks (could be wrong), macro is influenced by human actors like the Fed and politicians, most macro-focused investors tend to be traders who need to trade a lot (much costlier for an individual), and frankly, the literature for macro or macro-related fields is either a) economics (and economists typically fail to make money, even Keynes, who apparently migrated to value stock investing), or b) technical analysis. One reason I ask is that I find econ and global markets the most interesting of all finance/business topics (e.g. when compared to the happenings of one specific industry in a specific country), but it seems from my experience thus far that if I want to make money in my PA, I should either just index and diversify or do individual stocks, rather than trading ETFs or learning natural gas or something like that.
Take a look at ‘Market Wizards’ and ‘The New Market Wizards’. Those books compile interviews with a series of highly successful investors across a range of asset classes and investment styles. For balance, you might want to read ‘Fooled by Randomness’ by Taleb. If you can stand his massive ego, he makes some good points to suggest those traders featured in Market Wizards might have been more lucky than skillful.
My last job involved macro analysis and macro quant. All I can say is that, you have to be superman to do all the macro analysis alone. Amount of information is overwhelming, and then you have to read between the lines at many places, you have to do some analytics at many places, and believe me, it’s a lot of reading, lot of data gathering, lot of pattern searching, lot of modeling etc etc. As a team, it’s manageable, that too after you have macro research subscription from major brokers, which are excellent warm up before you fire up your analysis. Or you can find your niche… like Shipping maco, or technology macro… etc etc. Still the amount of information in that would be overwhelming, and it’ll be a full time job if done properly. I’ve never seen anyone trading macro, unless he/she had loooong experience in market and most importantly a solid feel of market. OR… You can always shoot arrows in dark though!
^ The point is, it’s a full time job, you can’t be trading macro as sideways gig, unless you are 3500%+ Shia Lebeouf!
Do you absolutely need the full picture to trade on a macro level? Can’t you focus your analysis on a particular point of it? Secondly if your models are developed why is that so time consuming as you mentioned? Normally the macro world doesn’t change abruptly? (but I may be mistaken) Paul
Bernake - how did you find working in macro analysis? Was your team responsible for making asset allocation decisions between different asset classes and/or geographical regions? Would be interested to hear from you if that was your role.
Pauluss Wrote: ------------------------------------------------------- > Do you absolutely need the full picture to trade > on a macro level? Can’t you focus your analysis on > a particular point of it? Absolutely! > Secondly if your models are developed why is that > so time consuming as you mentioned? Normally the > macro world doesn’t change abruptly? (but I may be > mistaken) > > Paul It’s lot of work with lot of information basically. Problem with macro models is that, often you will find situations in market which were never experienced before (if your outlook is short term tactical), so macro models basically do a good job of interpreting data, from there you can pick up. Once you get the idea of what to search for, you are good to fire up your analysis, collect more data and do more analytics, broadly I can say you look for correlation, once you find something significant, then you can start working on more analysis to find the asset class/sector where you can possibly find a sweet spot. Most importantly, you need to have someone really experienced in market to do all this, lot of this is quite creative process. I wish I could’ve stayed in macro analysis for forever.
What was your background that got you into macro? These are the rarest opportunities from what I’ve seen – there seem to be very few good macro funds, and they are very, very selective.
Carson Wrote: ------------------------------------------------------- > Bernake - how did you find working in macro > analysis? Was your team responsible for making > asset allocation decisions between different asset > classes and/or geographical regions? > > Would be interested to hear from you if that was > your role. Mostly asset allocation, at times sector allocation too but real beauty of macro analysis is asset allocation IMO. While my team was responsible for finding the preference of asset class/sector, rest was left to analysts to find ideas in that sector/asset class. Never got a taste of different geographies though, just US, but at times you need to incorporate macro data from other countries (like the case of June 2010), would love to work on geographical allocations though :-)! But, you need a lot and lot of data, that’s the biggest problem while doing macro stuff, that’s why it gets harder to do macro level analytics on sector. First of all sector specific data is hard to find, secondly old data is hard to find, for much of such data you have to pay. The lack of data just kills the model. Mathematically, it depends, sometimes it’s quite easy sometimes it’s very difficult. Sometimes it’s plain simple regression, sometimes you have to use little more sophisticated stuff like kalman filter, hidden markov models, classification, neural network etc… mostly it’s data mining. That’s my experience, I’m sure, there’s lot more in macro analysis. I can easily spend my life doing macro analysis :-)!
bromion Wrote: ------------------------------------------------------- > What was your background that got you into macro? > These are the rarest opportunities from what I’ve > seen – there seem to be very few good macro > funds, and they are very, very selective. Electrical major from topmost engineering college in my country. It wasn’t a macro fund, it was a normal fund with a small team specifically for macro analysis which mostly did asset allocation and sometimes sector allocation, and that was something of distaste too, macro analysis was not their primary objective, they did this for the alpha that can be generated with changing (not aggressively like a macro fund) asset/sector allocation. Primary source of their return was hardcore fundamental analysis as usual, and most of the stuff outside asset allocation we did there was completely voluntary. Finding a good macro analysis job is truly difficult and competition is huge, I tried at few places but they prefer people with significant experience in this, junior level roles are very very less, couldn’t find it so switched to exotics otherwise my resume could have become illiquid in some time.
Yes, data is the big challenge with macro. Lots of problems, as Bernanke mentioned: 1) The available data often doesn’t cover the exact aggregates you need. 2) When it does, it often doesn’t go back in time far enough for you to get real comparable analysis. 3) Even when it does go back far, often times there are regime changes that make it hard to interpret. 4) Most of the data that’s available is widely distributed, so your edge tends not to be about how you get the data, but instead on how you analyze it. Even very expensive data is widely distributed among the funds that can afford it. 5) Macro is typically a high volatility strategy. It can generate uncorrelated returns over the long term and also high returns, but with high volatility. This makes them hard to market to investors. 6) Lots of macro people come from prop trading backgrounds. Classical asset managers don’t have a natural path to macro funds. Tactical Asset Allocation is the asset management sector that is closest… but generally TAA is not as favored as traditional AM because there are relatively few decisions to make… a universe of may 30 stocks, currencies, bond decisions vs say 1000 individual stocks.
bchadwick Wrote: ------------------------------------------------------- > 6) Lots of macro people come from prop trading > backgrounds. Classical asset managers don’t have > a natural path to macro funds. Tactical Asset > Allocation is the asset management sector that is > closest… but generally TAA is not as favored as > traditional AM because there are relatively few > decisions to make… a universe of may 30 stocks, > currencies, bond decisions vs say 1000 individual > stocks. It’s a little bit off topic, but always wanted to ask this. Can you enlighten us about (usual, best, should be avoided) paths to macro funds world :-)!
It’s pretty idiosyncratic, how people get there. However, the guy I work with, who worked with Louis Bacon at Moore capital points out that lots of the big people in the macro world come from the liberal arts backgrounds that get so derided around this site. It makes sense, because critical thinking skills are even more critical when you are trying to make sense of the gaps available in the data. Being able to look at things using a financial, economic, sociological, and political perspective, even when these might lead to different conclusions is really useful, and liberal arts helps with that. A fair number of them were philosophy majors… again useful because knowing why you know something and why knowing something might not help you is worth knowing. 
So systematic macro is basically GTAA, and that’s the path you want to be in (I think) if you want to go to a macro fund from the traditional AM side of things. Discretionary macro is fairly trading oriented, so lots of prop traders. There’s also a lot of technical analysis on the discretionary side. Technical analysis also makes a fair amount of sense when you are working with things like currencies and government bonds. The thing that the traders with experience have is a sense of the “rhythm of the market,” how things like options expiration, end of quarter/year, etc. affects liquidity and who is on the other side of the trade. I don’t have a good sense of that myself… I’m more of an emerging markets macro analyst myself, and more about the long term. Currencies is also a good area to get into if you want to head in the macro direction. Virtually all macro funds have to think very carefully about currencies, and most actively trade them. Similar to currencies is foreign fixed income, because often times one takes a currency position by holding foreign bond instruments. So if you are charting a path and want to get to macro, I’d say it’s easier to get there from currency work and foreign government bond work. Combine that with good strategy analysis, and I think you can make good arguments that you’re an asset to macro funds (or alternately, do good technical analysis. I’m more of a strategy guy myself). The other issue is that the macro space is really a *very* small space in the investment/asset management industry. Part of the reason is how the industry is structured: major investors like pension funds, insurance, etc. (sometimes referred to as “real money” managers) often do their asset allocation by themselves and usually use some version of either MPT or the Swenson/Endowment model. In either case, the wide mandate of macro managers means that if real money managers invest too much with a macro manager, that macro manager can start to mess up the institution’s asset allocation. As a result, real money managers may like macro for the diversification it offers, but they don’t like the risk that the macro manager might be all in fixed income (or all something else) at one particular point and so the institution’s true asset allocation is off base. I don’t know if that last paragraph made any sense, but the main point is that macro is a small part of the investment industry because it doesn’t really “fit” into the traditional way of managing assets. The risk means that - although it’s welcome as a diversifier in real money portfolios - the allocations are necessarily small, and even smaller, given that macro tends to be a high volatility strategy.
Thanks for the insight, Bernanke and bchadwick. It’s hard enough to learn how to pick stocks well from a bottom up perspective, but I imagine it would be much harder still to learn how to invest well in multiple different asset classes across multiple different countries in multiple different currencies. That seems like a daunting task.
Thanks BChad, it definitely cleared many doubts. I am myself quite inclined towards behavioural finance.
to the OP, why would you divert your energies from value investing considering it is a proven strategy that many people have used to generate good returns? As you said, value investing is hard enough as it is, why pick out a more complicated strategy that, while being more interesting, may not even make you money? JMT.
Why would you want to have anything in your portfolio but AAPL, considering it is a proven stock that many people have used to generate good returns? As you said, AAPL is tough enough to research as it is, why pick out companies that, while being more interesting, may not even make you money?
Simple, you don’t know AAPL will make you money in the future. Value investing likely will.
Buying a stock at a 10% discount to fair value will not make you money if the macro situation goes into the cr@pper. We tend to have once in a lifetime economic/financial events every 5 years or so, somewhere in the world. (Oil Crisis of 1973, US Delinking from Gold Standard 1974, Emerging Markets debt crisis 1982-6, US S&L crisis 1987, Collapse of Soviet Union 1992, Asian/Mexican/Russian/Brazilian Crisis of 1997-9, Dot-Com Bubble 2000, Sept 11 2001, Housing Bubble 2003-7, 2008 Financial Crisis… next?) The reason you don’t just buy AAPL is not simply that you are uncertain that AAPL will make you money in the future. The reason is that you want diversification of your risk exposures. You may also need to have diversification of risk exposure across strategies. Growth may not outperform Value over the very long term, but a Growth/Value portfolio in the right proportion outperform either one on a risk adjusted basis if it is reblanced regularly. The other issue is to ask yourself what is it that you are good at analyzing and thinking about. If you have a feel for macro issues that others don’t, then the way you add value to the process is to use that knowledge in that context. It’s a comparative advantage issue.
bchadwick Wrote: ------------------------------------------------------- > The other issue is to ask yourself what is it that > you are good at analyzing and thinking about. If > you have a feel for macro issues that others > don’t, then the way you add value to the process > is to use that knowledge in that context. It’s a > comparative advantage issue. How would you develop this for once in a lifetime events? Serious question. In stocks, it’s mostly about pattern recognition, and while it may not happen “exactly” the same way on a regular basis across various companies and industries, there are certain types of bets that are a lot more likely to pay off, and to produce value for your investors, you basically just have to learn where and how to look, and then be better, faster, or more thorough than your peers at identifying such situations. I’m not sure you can say that about macro investing (although I’m hardly an expert in macro so I couldn’t say). I guess my point is that it seems difficult to develop a sustainable competitive advantage in looking at broad economic trends given that patterns are not (seemingly) as likely to emerge.