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 . . .

Category: Analysts, Apprenticed Investor, Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Curse of the Macro Tourists”

  1. VennData says:

    Kids love the water park and the little lady does macrame while I pumped all our hard-earned savings into the skeeball machine.

    I am looking for someone to blame’ it can’t be those nice men, I trust who advertised that pot ‘o gold if I get enough tickets. I believe in Rick Santelli. He reminds me of myself when I get angry. No. I blame the Obama park ranger for ruining our summer holiday.

  2. Hallsto says:

    Convenient timing on the article Barry. How many of these guys had losing trades until they were suddenly elevated to rockstar status ~2007? Kick em while they’re down, its easier.

    • That’s exactly my point!

      Each of these guys made money doing what they did best, and then got out their investing passports. Once they became macro tourists they gave up their advantage.

      The term implied trying to make investments based not on Value Investing or Arbitrage or Shareholder activism or other such expertise, but based on their best guesses about where the global economies were going. That has not been a successful strategy.

      So yes, in the past they had much better years but that was when THEY WERE DOING WHAT DID BEST — and not being macro tourists.

  3. Low Budget Dave says:

    In this blog (and others), the big markets have been described as a sort of Cinderella ball, where you know everything is going to turn into a pumpkin pretty soon, but no one wants to leave while there is still dancing to do.

    Through the magic of QE, the dancing has continued long past midnight, and the punchbowl has been refilled by issuing IOU’s (to be repaid after the next ball).

    Should we leave, on the assumption that the ball can’t go on forever, or should we dance? Everyone else is still dancing and drinking the free punch, but many of them have a better means of escape than I do.

    The other dancers own real estate, and gold, and means of production. When the party stops, they can go back to their nice houses and lay off a few servants.

  4. adbutler007 says:

    Agreed, narratives are silly and dangerous when used to make investment decisions.

    That said, from a valuation perspective I still fail to understand how one might feel constructive here. Sure, there are valuation metrics with dubious statistical significance that one might conjure to feed a bullish bias, but the valuation metrics that matter statistically suggest that returns to U.S. stocks from here are unlikely to deliver returns much above inflation for the next 7 to 15 years or more.

    Lots of _evidence_ here:

    http://gestaltu.com/?s=valuation+based+equity+market+forecasts

  5. VennData says:

    Also add the WSJ / Rupert Murdock / Fox team with their pelading with you to buy gold on February 15th 2013.

    http://online.wsj.com/article/SB10001424127887324616604578302284234282160.html

    Yet you GOP voters continue to listen to what their opinion page has to say with out looking for other opinions.

    Obeying the WSJ opinion page is a Macro Vacation staple.

  6. [...] It is easy to get sucked into the ‘macro vortex.’  (Big Picture) [...]

  7. cowboyinthejungle says:

    You certainly appear correct to this point, whilst the macro tourists appear to have been hurt by the pitfall of attaining “expert” status. We must all remember that no matter our mastery of a given niche, we are all novices on global complexities. Does even the best human mind have the ability to understand and assimilate all the complexities in a non-emotional, narrative-less investment approach? I would say no, but I’m a pessimist.

    Having said that, let me flip your analogy. When tourists from all walks of life begin to point out very real infrastructure problems in the resort you are staying in, it may be worthwhile to make sure you’ve got some travel insurance, spare cash, and a clean set of clothes.

  8. needaclue7 says:

    Personally, I think the whole Hedge Fund industry is 95% populated by the modern day equivalent of carnival hucksters. And since there is no reliable way to obtain the entire track record of any fund manager (all the private equity funds they have ever managed, winners and losers), I’m not sure that any regular investor can reliably discern the difference. And even the winners made their mark with what were probably a couple of good ideas or insights that propelled their funds and themselves to “rock star” status. But history has shown that, for the most part, even the rock stars came back down to earth. Perhaps this was because they became “macro tourists”, but it could also be because they couldn’t sustain a line-up of good ideas, hence their resort to macro-tourism.

  9. [...] a political Macro argument, and not a true investing thesis. As we have seen this past year (Curse of the Macro Tourists), building an investment around a big macro theme has not been a particularly successful strategy. [...]

  10. [...] that even the best hedge fund managers using the macro approach have done poorly. We call this the curse of the macro tourists, in which formerly talented fund managers ignore valuation and earnings data to build an investment [...]