Macro or top-down investors generally base their decisions on current or future economic events. They start their selection process by analyzing asset classes, themes, markets, sectors, and industries, before (if at all) moving on to analyzing individual companies. Macro investors may very well pick a basket of stocks that fit their top-down profile or macro prediction.
For example, if an investor predicts that water will be a scarce and profitable resource in the future, then he or she will invest in stocks that operate in that sector currently. Because of this, macro investors are generally different in their approach than bottom-up investors (value investors, growth investors, or fundamental investors).
The inherent risk in top-down investing is in the case that one’s macro prediction does not materialize (perhaps water utilities do not become a very profitable business). In that example, the associated positions that were invested in to initially capitalize on that macro prediction do not achieve the expected returns for the investor.
Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.