The biggest problem with economic forecasting for the purposes of investing is that it is difficult to quantify it specifically enough to fit it into any kind of a timing model for investing. If I could do it I would, I just have never been able to figure out a way of doing it.
It is so macro in nature and most of my investing/trading is in much shorter time frames. Fundamentals do drive markets but in shorter time horizons markets can go their own way. Markets are not necessarily efficient on a day to day basis, but are efficient over years of time. I do think at the very least an economic slowdown is on the horizon, how bad it will get I do not know.
Here is a possible scenario that could play out. A dip into the fall in stock prices, followed by a decent rally upward. Mid next year the economics take over and we get a pretty good selloff that ties into the slowdown most of us see coming. Under this scenario the markets would diverge from the larger picture fundamentally deteriorating situation but just for a 3 to 6 month timeframe. After that the macro effect takes over and we roll over.
I have no idea if this will happen, it is just the price action my models tell me to look for. The rest is just my opinion of what would explain it and my opinion is not better than anyone else’s.
Here are my two cents about using economics for investing or just do trading. It depends on several factors including time spent on it, if you like doing it, risk willing to take, or simply your talent.
There is no answer as to what is better, and even traders often put some of their money into investments.
Investing might take as little time as rebalancing every few months, while trading might take some serious effort to develop a strategy.
Maybe you like studying economics and be able to apply it in your business, or maybe you like to study numbers, charts, and programs.
Regarding the risk, there is no single answer. With trading you might be able to only risk small amounts at a time, and therefore avoid getting caught on the wrong foot, when a hyperinflation or a depression occurs. You might however keep losing money if your trading model stops working, and how do you know when to change your model? Investing has some kind of safety, if you don’t overpay, because first you are getting a yield in the form of interest, dividend, or rent. Second, if your are diversified into asset classes, it is unlikely that one day nobody likes companies, cash, commodities, real-estate, or gold all at the same time. In the worst case you can use all those assets yourself.
Looking at the average skill, it is certainly easier to invest than to trade. If you just throw darts at the S&P, you might make the average 9% per year, and if you use economics to guide you a little (to tell what is a good deal when), then you might do even better. If you are an average trader, you might maybe end up making 0% (since it is a zero-sum game) or maybe just the interest on your unused cash-balance. Maybe you can steal a little performance from investors, who don’t care when to get in and out of their positions.
So this is really a question of skill that you have find out if you can beat investing by trading. If you do, you might do extremely well as ChrisJ has proven. But many others don’t that well.
