Why I'm not a big fan of top-down analysis

Investopedia: Top-down analysis is a method of analysis that involves looking at the “big picture” first, and then analyzing the details of smaller components. By first analyzing the overall picture, such as a macroeconomic trend, an investor can start narrowing potential companies/investment to analyze.

Although it sounds beautiful and rational, I see many defects in top-down analysis. 

Let’s just start with the example of its application in investment world.

One of the best examples of the top-down analysis flaw is the US election period and the beginning of the Trump presidential administration.

During the US 2016 presidential election campaign, two candidates competed for the presidency: Hillary Clinton and Donald Trump.

Before election day, they were showing a sustained but narrowing lead for Clinton.

The Telegraph’s poll tracker, showed Clinton leading with three percentage points over Trump.

American statistics and polling analysis site FiveThirtyEight gave Trump only a 30% chance of victory going into the final few days (by the way, I believe the polling method uses a similar method to the calculation of economic data such as inflation, namely through sampling and statistical calculations). And many more survey institutions provide similar conclusions.

Not all survey agencies were wrong, but the consensus of that time stated that Clinton was the winner of the 2016 presidential election.

In fact, many financial and business news at that time posed that Clinton's victory was good, while Trump's victory was a disaster for the stock market (this is related to Trump’s controversial statements during campaigning that are likely to be nationalist and protectionist).

Is this macro-politic analysis correct?

WRONG.

It turns out that Donald Trump won.

There are so many parties who mistakenly predict the results of the 2016 US election.

The lesson is: although it feels good to be in the consensus (due to confirmation bias and herding mentality), it turns out that consensus is not always true. Being in a consensus does not make you right. And countless data and sophisticated statistical calculations do not help (how many of us often naively ingest data just like that? Are we sure the data presented, is accurate enough?).

And after they mistakenly predicted the results of the 2016 US election, were they right in guessing the Trump winning effect?

WRONG AGAIN.

Instead of free fall into abyss, the US stock market is rising as fast as it can, leaving the market forecasters in the dust.

Even more strange, when Trump embodies the spirit of nationalism and protectionism (ex: US withdrawal from TPP), the market is also still rising.

The lesson is: say you’re correctly predicting something (in this case the election results), the market reaction can be different than you think.

And after Trump wins, the market again guesses, what economic policy will Donald Trump take.

One of them is related to monetary economic policy. During his campaign, Trump often denounced the Fed governor at that time, Janet Yellen, for her policy of letting interest rates fall too low and too long.

So the market assumes that Trump is a "hawkish" guy and will try to influence the Fed to raise interest rates.

Is this macro-economic view proven true?

WRONG AGAIN.

Later Trump stated that he was a low-interest rate guy. And not only that, Trump was also very close/familiar with Yellen and comfortable with the Fed's policy at the time.

Not deterrent in making a mistake in predicting, the market predicts that the USD will strengthen significantly against other currencies as US monetary policy tends to tighten.

Is this fundamental top-down currency analysis proven true?

WRONG AGAIN.

USD weakened significantly since the beginning of Trump’s administration.

I can show dozens of other examples of flaw of top-down analysis, but I am tired of writing the word "WRONG". I myself am also astonished why top-down analysis can be so wrong in that short period of time.

Through the above examples, I just want to point out, how big is the room-of-error in top-down analysis.

Say you are correct in predicting macro variables, you can still be wrong in guessing the market reaction (which in fact has more influence on the value of your investment). The market does not know you. It has no obligation to obey you.

The trouble is, many people like to talk about confusing macro matters just to look smart, hence macro chats will always re-tempt investors to make predictions.

For me, I understand that the macro things that used in top-down analysis are actually things that are out of my control anyway. There’s nothing I can do to influence the market, Trump or the Fed. So, I leave it alone.

Therefore, I’m not a big fan of top-down analysis. 

I don’t want to look smart, I just want to be right often. However, it seems by often doing top-down analysis makes my chances of being right smaller.
I’m not saying that top-down analysis is a wrong practice, but it is less accountable.

Relying on your investment decisions based on top-down analysis is a dangerous thing.

As the name implies, it can bring your investment value from "top" to "down".

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.