Friday, August 11th, 2006
The importance of economics to growth investors
The market volatility created by the Federal Reserve this week has reinforced the need for successful investors to have at least a basic understanding of how economic policy works.
Earnings growth, which lies at the heart of growth investing, is closely tied to how the economy is faring. Raising interest rates to head off inflation will slow the economy down, making it tough to generate fast growth.
Victor Sperandeo in his book ‘Trader Vic - Methods of a Wall Street Master’ is correct when he says: “it can be a financially fatal error to shrug off economics as pointless if you want to make money in the financial markets.” He dedicates two whole chapters to economics.
Reminiscences of a Stock Operator also showed that Jesse Livermore closely monitored the money market and broader economy to form his speculative judgements.
One place to learn about economics is former Bush adviser and Harvard professor Gregory Mankiw’s blog. He deals with current economic issues, such as inversion of the yield curve, in an interesting way that is easy for the lay person to understand.
Funnily enough, Mankiw sounds like a trader/investor in his attitude to writing economics papers:
“The truth is that producing bad papers is one of the costs of producing good papers. When you swing for a home run, you are more likely to strike out. The only way to avoid the occasional strike out is to quit the game. Here is my advice to a young academic: You will be judged by your five to ten best papers. Your bad papers will be mostly forgotten. So be willing to take risks, if there is a reasonable chance of a big payoff.”
Word Count: 275. This entry was posted on Friday, August 11th, 2006 at 9:07 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
