I want the dollars

It’s extremely hard if not impossible to time the market. It’s even harder to time when a market bubble is going to pop.

Sure, identifying a bubble isn’t that hard. Individuals and experts do this all the time and directionally speaking, they are usually correct. But actually timing when a market bubble is going to pop, that is an extremely difficult task.

Investors who typically try to time market bubbles usually take a top down approach to investing, rather than a bottoms up fundamental analysis approach.

Here’s the thing.

When you are a top down macro investor, the amount of variables in your analysis is significantly greater than when you are underwriting a single investment for your portfolio. Trying to make large macro bets usually doesn’t work over the long-term.

Take Kyle Bass, the founder of Hayman Capital for an example. In 2007 Kyle Bass made a bet that the housing industry was going to collapse. After shorting subprime mortgages, Hayman Capital earned 212% in a single year.

However, since then, Hayman’s returns have been subpar.

Over the past 91 months, or nearly eight years, Hayman Capital’s main fund had an annualized performance of just 1.56 percent, according to calculations from Hayman Capital letters to investors, which were obtained by The Post. That’s slightly better than a Treasury bond ETF — but not much else. - The New York Post

The list of failed top down macro investors is astounding. From portfolio managers trying to time a currency collapse to others shorting entire countries. It pays to not be a top down investor. As legendary investor Seth Klarman states in Margin of Safety:

There is no margin of safety in top down investing. Top down investors are not buying based on value; they are buying based on a concept, theme, or trend. There is no definable limit to the price they should pay, since value is not part of their purchase decision. It is not even clear whether top-down-oriented buyers are investors or speculators. If they buy shares in businesses that they truly believe will do well in the future, they are investing. If they buy what they believe others will soon be buying, they may actually be speculating. Another difficulty with a top down approach is gauging the level of expectations already reflected in a company’s current share price.

What pays is being a bottoms up fundamental investor. Focus first on identifying an undervalued asset. Then after you complete your due diligence focus on the macro backdrop that could effect this single investment, if there is any.

It is much easier to underwrite a single investment in a small American corporation trading under book value than short a global currency. Sure, your short thesis may be spot on, but actually timing when a currency is going to collapse is a whole different ball game.

And I think that goes for all macro bets. Typically if a macro bet goes wrong you can lose a significant amount of money. Top down investing is more of a speculative bet over bottoms up fundamental investing. On the flipside, when you underwrite a single investment in a corporation with a large margin of safety, your downside should be well protected should the absolute worst case scenario happen.

If you want to look smart, make the big macro bets. But if you want to make a lot of money, underwriting an investment with a large margin of safety is where the real dollars are at.

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