A Personal Finance and Investment Arm of The Business Times


Value Investing vs Macroeconomics

What I am suggesting is that value investing has little to do with macroeconomics. If someone claims to be a value investor but spends all their time discussing events in the United States or events in Europe, they are an economist and a macro economist at that. Attempts to impress you with their knowledge of bond markets, credit default swaps and international debt levels, are merely unwitting attempts to see you make the mistake of believing a Monday Expert is the safest person to place your funds with.

And think about this; Is it not arrogant to presume that one has been able to discern all the influences that could affect markets in such a way that only they have the answer and nobody else has worked it out yet?

It is however reasonable to assert that macroeconomics and in particular, interest rates and corporate profits as a percentage of economic growth rates, have an effect on the aggregate performance of stocks. And Australia has been the lucky country – avoiding recessions that have befallen the United States and Europe – thanks to our proximity to China and our abundant resources. And yet, the All Ordinaries index is today at the same level it was in 2009, 2008 and 2005.

So, on first glance, it would seem that Australia's status as the lucky country has not translated into substantial performance on the stock market.

Indeed, if you believe those who follow the gyrations of the index then you would think there is no gain to be had by investing in shares at all. The reality however is rather less depressing. In the last decade there are many companies whose shares have increased threefold (QBE, ASX, BHP) or more than fourfold (ORI, ORG, OSH) or even more.

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