Macro Investing

August 21st, 2013 by Potato

Netbug asked how to invest in lab-grown meat (as well as a number of other emerging trends). I think that top-down investing is very difficult to do. You can be right overall, but so many factors can prevent you from making money on the call:

1. The profit source isn’t where you think it is. Maybe only private companies are in the area so you can’t invest, or maybe it’s not the guys with the mines that make money in a gold rush, but the guys selling pickaxes and lanterns (or not the guys selling 3D printers, but the stodgy old chemical supply companies with the polymer supplies).

2. The sector moves ahead while companies stumble and fall behind. The airline sector is an interesting one: you could have foreseen an age where people fly all across the globe, hundreds of flights into every major city every day of the week. And if you tried to invest in the airlines as they were founded you likely lost money on that vision. They have gone bankrupt with notorious regularity. People still fly, new airlines emerge (and old ones reorganized and brought out of bankruptcy), but that knowledge hasn’t been very profitable.

Similarly with cell phones: the omniconnected world comes closer every day. Everyone has a cell phone. People are disconnecting landlines in favour of cell phones, something that might have been unfathomable 20 years ago with the spotty service, high cost, poor voice quality, and miserable battery life of early cell phones. Yet even though the vision of a technological future you had may be coming true exactly as you pictured it (right down to that prophetic dream you had about touchscreens), it’s unclear how you should have invested in that trend. Motorola had it’s rise and fall, as did Nokia and then RIM. Apple could well be next. The carriers have done fabulously well in Canada and the US, but some European ones have barely paced their indexes. Cisco was meh while Nortel blew itself up. Maybe you would have been lucky enough to spot Qualcomm in the early nineties (though if you didn’t think about it until the late 90’s you were too late).

3. The market prices in expectations, so not only do you have to be right in your vision, but you have to be one of the few to see it (or at least one of the first). Converting a portion of our vehicle fleet to run on natural gas makes sense for emissions and because of the huge differential the past few years (and projected to remain so) between the price of NG and oil. However, everyone already knows this, so the price of Westport Innovations is through the roof. For many years pharmaceutical stocks had outrageous multiples as everyone counted down the years until the baby boomers’ health started failing.

Enough people have asked me how to invest in certain trends and I’ve banged my head against enough walls trying to figure it out that I have to throw my hands in the air and say I can’t do it. I’m just wired up to be a bottom-up investor (and at least partially as an indexer). But I also think it’s just an inherently harder problem, with more moving parts to spot.

The best macro idea I’ve had has been the Canadian housing bubble. The evidence is there, and it’s contrarian enough that it’s not priced in to a large degree. The problem is I can’t think of what to go long on for that bet, and there aren’t any good hugely asymmetric payoffs like subprime CDOs. The best I’ve got really is to short a few stocks, and the timing is just too hard to call for a straight short or expensive, illiquid put.

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