David Einhorn, Value Investing and Macro Economics

Traditionally, value investors have tended to ignore macro economic issues and focus on bottom-up investing. The was based not only on the idea that if you purchase a great business at a good price the investment will work, regardless of the macro economic forces at play, but also that the economy cannot be predicted with enough precision to be useful. Recently, value investors have been challenging and questioning this long-held view. I suspect that this has been precipitated by the fact that many value investors saw their portfolios get crushed in the latest bear market.

David Einhorn is now on record as an investor who has begun to pay a lot more attention to macro economic issues. Here’s a quote from his recent talk at the Value Investing Congress.

“The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself a “bottom up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure more actively, worrying about what may be brewing in certain industries, and when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.”

The entire speech is available online courtesy of the excellent blog Market Folly.

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