When reviewing industries, the information can add two separate layers of information Firstly, the research can help you understand specific industries and equities within those industries that are poised to provide the best returns. Secondly, it can give you a broader understanding of the macroeconomy.
You can’t allow your macroeconomic research to be the basis for your investment returns, especially if your investing focus is industry based or company specific. The good news is if you get the macroeconomic analysis correct, it increases your potential returns for the individual equities and industries that you choose to invest in. Macroeconomic analysis adds a layer to your research. Good investors figure out multiple ways for their investment to provide returns in a range of varying circumstances.
The risk is if your analysis is wrong, you can turn a good stock pick into a loser in the intermediate term. A great firm with a strong moat should do well in the long run, but buying at the best price is obviously always essential.
If you can’t do macroeconomic research, but really like an individual company, it’s best to avoid worrying about the economy. It’s better to do nothing than add poor analysis to your process. In an oversimplified example, this would be akin to if you did hours of research on why a semiconductor firm has a competitive advantage, but then didn’t buy it because of a half-baked thesis on rates moving up, and that theoretically being negative for equities. If you are investing yourself or other people’s money, you need to fully understand the risks and potential opportunity, instead of relying on research you didn’t fully understand, regardless of whether its bearish or bullish.
Restaurant Sales Growth Was A Failed Indicator
The second advantage of industry-based research is that it can provide a broader macroeconomic viewpoint. One industry shouldn’t be the basis of a macroeconomic thesis, but it certainly adds depth to your understanding of certain segments of the economy, allowing you to perceive potential problem areas or opportunities for growth for a broad number of industries. A big mishap many macroeconomic investors made was trusting the restaurant industry’s sales growth in 2016 and 2017. Its sales growth decline made it appear as though a recession was certain. This is why it’s important to avoid opinions and commentary that claim one indicator has more value or credibility than multiple other indicators that could be suggesting something completely opposite.
