Editor's note: This week, we're featuring some of our favorite timeless investing lessons from our colleague Dan Ferris. In today's essay, he shares an idea that helped Warren Buffett and Peter Lynch become some of the world's greatest investors…
Today, I'm going to teach you one of the hardest lessons for investors to learn…
It's worth it to try, though. The fact that most investors will never learn this concept gives those of us who do a huge advantage now and forever.
It may come as a shock… You may find it very hard to believe… But it's the key to success for some of the world's most successful investors…
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.
Most people base their investing decisions on economic data, forecasts, and what they hear in the media. They obsess over unemployment numbers… the Producer Price Index… housing numbers… interest rates… factory orders… industrial capacity utilization… the Baltic Dry Index…
But the wisest, richest investors in the world say to forget it.
Business partners and billionaire investors Warren Buffett and Charlie Munger, for example, have been investing their own and other people's money 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 it's all useless noise. Most of that economic news has little value at all for investors.
Instead of worrying about all that, stick to studying great businesses.
Companies like Wal-Mart (WMT) and McDonald's (MCD) thrive in recessions as consumers pinch pennies. Consumer-products giant Procter & Gamble (PG) steals market share from its competitors during tough times because it has enough cash to maintain its advertising. In 2009, Berkshire Hathaway (BRK) used its massive cash hoard to make incredible deals with cash-strapped firms that couldn't access credit anymore.
For every great business like these, there's somebody who thinks a macro wind will crush it. He has failed to learn one of the greatest lessons for anyone who seeks riches in the stock market: Great businesses are great because they can ride out and even exploit macro problems.
Great businesses aren't cyclical. 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.
If you focus on buying great businesses, you can turn down the volume on the news fretting about the Fed's latest pronouncement.
You probably don't believe it… I get reader feedback indicating many folks refuse to stop obsessing about economic and political problems. They just don't get it.
What's a fella to do? It's my job to show you the way, to help you become a better investor. But lots of folks don't seem to want to hear it. Instead, they let the market guide their investing decisions time and time again… And they miss out on some great investing opportunities.
I'm not saying you should never read another newspaper. By all means, know what's happening in the world. Understand the backdrop in which you're investing. But don't waste a minute trying to figure out what stock to buy based on economic reports and forecasts.
Don't let macro fears prevent you from buying great businesses and compounding your wealth with great stocks.
Editor's note: Right now, Dan's Extreme Value portfolio contains several World Dominators… companies that are No. 1 or No. 2 in their industry… that gush cash and trade at huge discounts to the value of their assets. Learn more about one of those opportunities – and how to gain access to the rest of the World Dominators – right here.