I'm a professional investor (more than a decade of experience at hedge funds, particularly in global macro and quant, managing my own and other people's money).
Your central premise is flawed -- in particular
> Last 3 years has shown that to be a good investor you need to know macroeconomics
This is not true. It is true that 'macro' events (central bank actions, supply/demand shocks, wars, pandemics) affect prices, but it's not true that you need to be a macroeconomic expert to be a good investor:
1. Any understanding of macro you get from reading in your spare time is unlikely to be good enough to use as the basis for an investment strategy (although you may think it is -- but this will just lead to you making bad, or at best random, market timing decisions)
2. Even if you could become an expert, there isn't a clear mapping from macroeconomic outcomes to asset prices. So you not only need to be right about the macro picture, you need to be right about the effect it will have on asset prices (including the second- and third-order effects, e.g. central bank and other investor reactions to the macro outcomes)
3. Even if you do become a macro expert, and you have the correct mapping from macro outcomes to asset prices, it's not enough. You don't only need to be right about the macro outcomes, you need to be more right than the market. The market is made up of a huge number of diverse actors, many of whom have access to vast resources and spent literally all of their waking time trying to use macro data to predict asset prices. Are you better than them?
4. Even if the above can all be overcome -- is this really the highest return use of your time (compared to e.g. getting better at your day job and increasing your income, or starting a company in your area of expertise and getting rich that way)
That all sounds daunting, but fortunately there's a solution! Simply buy a diversified set of investments in a tax-efficient wrapper for a total cost of < 10 basis points annually, and add capital to the pot regularly, and you will get great investment results over any 25-30 year time horizon, with essentially zero effort.
I’m an economics professor (not in macro, but I’ve taken more macro and at a higher level than you have).
I think this comment is right on the money. None of what I learned in graduate school would help you forecast the price of a specific asset.
Some of the large investment firms do employ economics PhDs to help them make forecasts of particular broad macro variables (inflation, unemployment, etc.). I don’t know of anyone who uses their macro background to forecast specific asset prices (e.g., Amazon’s share price).
(Note that there are people in economics who study time series forecasting - that can be used to make forecasts for specific assets but is considered somewhat separate from most macro modeling, which is micro founded and done in a DSGE framework.)
I’d recommend you study macro bc it is interesting and intellectually rewarding, but I don’t think it’s going to tell you anything about pricing a specific asset.
I disagree, because macro view investment managers exist. Also, fixed income instruments react very predictably to macro trends. ie Ackman’s recent bet on interest rates that paid off [1]
Entire prop trade desks exist to bet on macro news like labor job reports, on many different asset types through derivatives like index futures, FX futures, etc… This is very easy to observe if you view tick data for these derivatives before and after news is released.
While macro view is less relevant on a single equity, it’s very much a proven way of investing in a variety of asset classes.
My bachelor's agrees on this. Macro is a set of theories that can explain a certain set of economic norms, but in most circumstances these theories don't have anything like the predictive power of scientific theories backed by experiment.
However, my retail investing experience suggests that what macro is good for is spotting cracks in the framework with respect to specific countries and industries. Cracks aren't prices - when a market is way out of equilibrium, prices can go along saying one thing for quite some time while the real economy does something else. But it can produce broad strokes answers of "don't touch this asset" vs "only temporary setbacks here".
>don’t know of anyone who uses their macro background to forecast specific asset prices (e.g., Amazon’s share price).
I can agree with that,
OTOH someone with uncanny ability to predict asset prices might be expected to do exceptionally well in macroeconomics, perhaps without any formal background at all.
A good deal of math would always be helpful and I like a mixture of business math and non-business math operating in the background.
If you are interested in investing in government bonds, macroeconomic forecasting could be quite important, but overall, it doesn't help you much for stock return predictions. In fact, very few variables (macroeconomic indicators included) show robust power to predict market returns.
+100. I spent some time at a couple hedge funds and couldn't agree more.
Even if OP wants to be an active investor, it's more likely they can do it Buffett style than Soros style. Many great investors have zero macro insight. Buffett, Munger, Lynch, Icahn, Ackman. There is a direct mapping from company level insight to the securities price - it's not easy, but it's at least understandable.
No. Since the stock market goes up on average over time, it's always correct by expected value to invest sooner, rather than holding money back to DCA in installments. Intentionally doing DCA if you have a sum that you could invest sooner is trying to time the market.
DCA is a useful side effect when you're investing regularly, but on average it does not beat investing sooner.
DCA should be thought of as a portfolio strategy that is X% in your nominal portfolio and 100-X% in dollars and gradually shifting to 100% your nominal portfolio. It's an attempt to hedge against negative equities early on, but there are better hedges, and if your risk aversion makes you not want 100% equities early on, you probably don't want 100% equities later on either.
No. Invest everything that you can now (into low cost diversified index funds or ETFs) and then top it up regularly as you get more capital from whatever else it is you do to earn a living (e.g. a percentage of your salary every month, a percentage of your annual bonus, a percentage of the annual dividend from your business etc etc).
Do you have any recs? I currently use VTWAX, VTIAX, and VTSAX as my index funds. Even split between all three. I would appreciate any recommendations on what to change in terms of allocation.
DCA only speaks to the cadence of investment and is often contrasted to (and underperforms) lump sum. The strategy as a whole could be summed up as investing in low cost diversified index funds.
In the UK (where I am) the main ones are SIPPs and investment ISAs. In the US I believe people mainly use Roth IRAs (this is not any special secret advice, it is like the first thing your tax adviser will tell you).
The glib answer is that my own advice in 2022 wasn't available to me when I started my career in finance in 2010.
The less glib answer is that what I said above applies to managing your own money as a part time investor. If you are managing other people's money as well as your own, and doing it full time, with access to huge datasets and sophisticated models, then you are playing a totally different game.
I think he's saying that no-one person can be better.
Stock market crashed on 9-11. So what happened the next time the world had such a huge hit (Covid)? the markets rose because everyone was piling to get that same post-911 dip. It didn't exist because everyone that was expecting it caused the same to not happen. So I guess if you think you know what's going to happen next. You're probably 1 of a million others that are guessing the same thing and so what you think will happen doesn't.
It also doesn't help that the government's reaction changes to major crisis events too - and those actions you can't predict- let alone what affect they will have.
It's basically a super large neural net (the largest). I mean can someone put in something crazy into GPT3 and before they enter it (something not entered previously) GUESS what's going to come out?
Yeah, this is what I was thinking too. If there was a theory by which you could predict the outcome of the market, the mere presence of such a theory would affect the market such that the theory no longer applied. Sort of a Heisenberg Uncertainty Principle of Economics, but worse. ;-)
> the markets rose because everyone was piling to get that same post-911 dip
What? The market (SPX) dipped 35% within a couple weeks in March 2020. Yes, it rose afterwards, because the FED opened the floodgates, but there was a very significant dip first.
> I'm curious why you became a "professional investor" instead of following your own advice.
Not OP but can answer... It's because if you don't start with a massive amount of capital you won't make enough money to support yourself. Hence why OP recommended to simply invest the time into your own job or start a business.
A 40% return on $100k (which is a great return BTW) is barely more than minimum wage...
Meanwhile a few % of a billion $ can sustain a firm.
Your central premise is flawed -- in particular
> Last 3 years has shown that to be a good investor you need to know macroeconomics
This is not true. It is true that 'macro' events (central bank actions, supply/demand shocks, wars, pandemics) affect prices, but it's not true that you need to be a macroeconomic expert to be a good investor:
1. Any understanding of macro you get from reading in your spare time is unlikely to be good enough to use as the basis for an investment strategy (although you may think it is -- but this will just lead to you making bad, or at best random, market timing decisions)
2. Even if you could become an expert, there isn't a clear mapping from macroeconomic outcomes to asset prices. So you not only need to be right about the macro picture, you need to be right about the effect it will have on asset prices (including the second- and third-order effects, e.g. central bank and other investor reactions to the macro outcomes)
3. Even if you do become a macro expert, and you have the correct mapping from macro outcomes to asset prices, it's not enough. You don't only need to be right about the macro outcomes, you need to be more right than the market. The market is made up of a huge number of diverse actors, many of whom have access to vast resources and spent literally all of their waking time trying to use macro data to predict asset prices. Are you better than them?
4. Even if the above can all be overcome -- is this really the highest return use of your time (compared to e.g. getting better at your day job and increasing your income, or starting a company in your area of expertise and getting rich that way)
That all sounds daunting, but fortunately there's a solution! Simply buy a diversified set of investments in a tax-efficient wrapper for a total cost of < 10 basis points annually, and add capital to the pot regularly, and you will get great investment results over any 25-30 year time horizon, with essentially zero effort.