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An investor should have well awareness on the macro and micro economic factors that affecting an economy or stock market. Both of these factors can make changes to the investments made by investors. But, to which factor you should give importance as an investor and which one need to avoid? Here is the best answer and why.
To make the answer clear, I would like to give a short definition on both macro and micro economic factors. Here it adapted from investopedia for your reference:
Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation’s capital account or how GDP would be affected by unemployment rate.
Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it’s production and capacity so it could lower prices and better compete in its industry.
Excellent definition. I hope you have got the idea what I am going to tell you. We will hear the same from legend investor Warren Buffett and will ask to him the sense of considering both.
As per him, never give any importance to macro economic factors. That is the common process with any economy and totally temporary. Instances like presidential changes, quarterly or yearly company results, general elections, all are falling to macro economic factors. These will certainly shake the stock market up or down but it would be temporary. As an investor, it is your time to get good stocks in a cheap price due to panic of public that bring the stocks price down.
Micro economic factors, closely integrated to the company performance and thus it have importance. An investor should have well awareness about the performance of a company and sustaining the same for long term. Micro economics tightly connect with the product, cost and demand in the market, that should affect the company and profit to a great extend. Company sales growth, cost of sales, capital allocation, debt increase or decrease, market monopoly all covering under micro economic.
As a value investor, keep avoiding the macro economic factors because it does have nothing to do for us. Keep an eye on such events to get best business in a best price. It is clearly a temporary behavior and would change back to normal. For your information, 98% of stock analysts and stock traders entirely depending on macro economic factors. They are generally making the report or buying shares on the recent possible changes that going to happen with nation or industry. You can experience the same by reading analyst reports or talking to any trader in your place. Mutual fund managers also, generally trust on macro economic factors than micro and that leading them to churn their portfolio time to time.
Any changes in micro economic factors affect to the root of a company and its performance. As a value investor, it is advisable to keep track on a company on the basis of influential micro economic factors like what legend investor Warren Buffett does.
