“If the economy is doing better, the stock market should do better too.”
If you ever hear any person, any economist, saying those words on television you know he doesn’t have a clue what he’s talking about.
The Fact is: There’s no correlation between the economy and the stock market!
None whatsoever. Business partners and billionaire investors Warren Buffett and Charlie Munger, for example, have been investing for more than 50 years.
And in all that time, they claim they’ve never had a single conversation about the economy. They simply don’t waste time on it.
The vice chairman of investment firm Fidelity, Peter Lynch, is one of America’s top money managers. He says if you spend 13 minutes thinking about economic and market forecasts, you’ve wasted 10 minutes. It’s just not worth thinking about.
Ben Inker of the money-management firm Grantham, Mayo, and Van Otterloo wrote an excellent paper demonstrating that there’s no meaningful correlation between GDP growth and investment returns.
In other words, stock market investors who think it’s important to worry about where the economy is headed are dead wrong.
Every minute you spend worrying about macro data has zero value to you as an investor.
It’s hard to remember this, though. Everywhere you look, the financial news media are constantly trying to connect the two. They’re obsessed with pretending to know what you should buy and sell based on all the economic data pouring out of governments, Wall Street banks, and the talking heads every day. But most of that economic news has little value at all for investors.
Don’t let macro fears prevent you from buying great businesses and compounding your wealth with great stocks.
Gross domestic product (GDP) growth and stock market returns have just about nothing to do with one another.
In fact, you can achieve great investment results without ever thinking about another “macro” issue again.
Instead of worrying about all that, stick to studying great businesses.
Great businesses are great because they can ride out and even exploit macro problems. They don’t get better or worse with the economy. They stay profitable and continue to gush free cash flow and pay higher dividends every year.
Companies like Wal-Mart (WMT) and McDonald’s (MCD) are good examples among many other businesses.
If you focus on buying great businesses and turn down the volume on the news, you can do well in the stock market.
Now, I’m not saying you should never read another newspaper.
By all means, know what’s happening in the world. But don’t waste a minute trying to figure out what stock to buy based on economic reports and forecasts.