It is easy to get caught in the narrative of whatever you have in your portfolio. But it is very hard to find a collection of assets that are truly uncorrelated. And even if you have a portfolio of uncorrelated assets they will still ultimately be affected by the macro environment.
This is why knowing which macro season you are in is extremely important if you want to manage your risk effectively and know what are the right conditions to make bets whose risk-reward tradeoff is tilted in your favour.
So what macro season are we in?
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Macro season
If you are an investor ignoring the macro economic environment is like ignoring the season when you try to predict the weather.
Take an easy example. I live in Hong Kong. On average there are 40 typhoons (Asia's equivalent of hurricanes) per year formed in the Asia Pacific region.
If I wake up from a coma and you ask me to guess how many typhoon we are likely to get this month, with no information given to me at all, I'll tell you probably 3. That's the best I can do.
Now tell me that we are in Summer and I can give you a much better estimate. Check out the chart below. I’ve broken down the count of typhoons formed in the Asia Pacific region for each season over the past 5 years. Tell me if you notice something.
That’s right, most of the typhoons are formed in the summer. The fall typically see half as many as in the summer and there is basically no action in winter and spring. The past 5 years is just for illustration, this pattern has been pretty stable for a long time.
Now the result is that if I know in which season we are my answer to the question has to how many typhoons I expect is going to be much more different:
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