Just when we thought we were done with Covid and Omicron this quarter, we were shocked to hear about Russia’s invasion of Ukraine.
We spoke last quarter about understanding uncertainty – that we do not know what will happen. Unfortunately, Q4 FY22 made this lesson painfully clear to all of us. This is the reason that the team at Shepherd’s Hill tries to avoid overthinking future macroeconomic effects.
As investors, we believe that it is more productive spending time on business models, margins, corporate governance, returns on assets, competition, etc. than Ukraine, oil prices, currency movements, Fed actions, etc. Who doesn’t think it would be nice to assess, maybe even quantify, specific macro effects on a Tata Motors or a Titan? Could it be worth the effort that a task like this requires? Our view is that achieving any useful and consistently predictive value from such an exercise is next to impossible.
Why is useful macroeconomic prediction so difficult? Think of The Market (any big securities exchange benchmark, such as the NIFTY) as a point that is being acted upon by some vector forces, having direction and magnitude, i.e. macro factors. In physics, we would use some calculus and vector analysis to come up with a precise answer for the resultant or effective direction and magnitude of the point, given the forces acting on it.
However, macroeconomics is nothing like physics or mathematics. To accurately analyse the impact of macroeconomic factors on The Market or a specific company, we would have to consider not just a few, but literally thousands or even millions of forces. Each of these forces is a vast specialty area in itself – whether it is oil, interest rates, currency movements, European geopolitics or Chinese real estate. For most force vectors, direction or magnitude, or both, may not even be available. Some are positively invisible and unknowable, such as the thoughts in Putin’s head at this moment.
Luckily, investors don’t need to solve this intractable problem to do well. We can just stick to well-run, strong, profitable companies that, on average, will do well over the long term regardless of macroeconomic headwinds.