By Abdulaziz Alnaim, Portfolio Manager and Managing Director at Mayar Capital
We’ve seen more than our fair share of macro shocks over the past two years, from the covid-19 pandemic and supply chain disruptions, to the Ukraine war and high inflation. By now, no doubt, there’s a fully operational crystal ball at the top of every investor’s Christmas wish list.
But knowing the course of future events and making money from that knowledge are two very different things.
For an investor to profit from a macro-economic prediction, three conditions must be present:
- The prediction must be correct
- The predicted view must be different from the consensus (otherwise it would already be priced in)
- It needs to be actionable. The investor must take a position in the market by buying or selling a security or entering some sort of financial contract where the outcome of that activity closely correlates, positively or negatively, with their prediction.
The third condition is often the hardest to achieve because the economy and markets are complex adaptive systems that are impacted by dozens or hundreds of factors that are ever-evolving.
That’s why, in my opinion, investors should try and take on the easier—though by no means easy—challenge of developing differentiated viewpoints on specific companies with a plan to either buying or selling the stocks of these companies. By making fewer and less heroic predictions, the odds of success are much higher, but are never guaranteed of course.
It’s far too easy to feel discouraged by the doom and gloom emanating from today’s news headlines, but I have my own way of responding. Instead of trying to predict how the economy will fare over the next three or twelve months, I prefer to focus on identifying companies that are tough enough to survive or even thrive in a difficult time. A strong competitive advantage and a robust financial position are vital in a challenging environment. The first allows the company to increase prices to offset inflationary costs, while the second allows it to withstand shocks and even capture market share from weaker competitors.
Unilever, for example, when reporting its Q2 results, increased sales growth guidance above its previously stated range and forecasted improving margins through a combination of price mix and savings.
Elsewhere, UPS, which reported increased profits in its latest results, stated that its “better not bigger strategic framework has fundamentally improved nearly every aspect of [their] business, enabling greater agility and strong financial performance.”
Due to the power of their competitive advantage, strong businesses come into their own in testing economic times.
We believe the bright outlook for many great companies today goes largely unnoticed. These are often companies with a track record of successfully maintaining margins and market share in difficult economic market conditions.
Are we concerned about the economic pain that the central banks will impose on economies in their battle against inflation? Sure. Will markets be volatile and swing wildly from month to month? Very likely. But even the wildest roller-coaster ride ends eventually. Great companies don’t go on sale that often. A bear market or a recession offer a rare opportunity for investors to buy shares in wonderful businesses at a discounted price. Patient investors will usually be rewarded with attractive returns in the long run.
If you happen to have a functioning and well-calibrated crystal ball, by all means try to time the market and leave, then come back at exactly the right moment. Otherwise, instead of wishful thinking, it’s far more productive to invest in great businesses when they’re selling at a discount, hold on to them for the long term, and let compounding do its magic!