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By Jason Stipp | 09-27-2010 04:31 PM

Herro: Investors Should Aim High in Steering

Investors who focus on unpredictable short-term macro trends instead of long-term company fundamentals are likely to be whipsawed, says the Oakmark manager.

Jason Stipp: There was an article in the Wall Street Journal recently that said that a lot of investors are trading on macroeconomic themes now, and it posited that perhaps the rise of ETFs and the ability of folks to take broad market positions has contributed to this tendency.

One thing that the article mentioned is that this trend, if it is indeed a trend, has confounded stock-pickers, bottom-up stock-pickers, because stocks don't seem to be trading on the fundamentals at least in the shorter term. As someone who does look bottom-up at stocks, have you found that it's been difficult to see your holdings trade on the fundamentals? Have they been trading on the fundamentals, or what's your take on that as far as a stock-picker's perspective?

David Herro: I think there is a lot of exactly what you're saying is happening. People are afraid to stay focused on the fundamentals, so they are going to the macro. The problem with that for them is the macro changes like the wind, it's like the weather. There is so many variables, there is unstable coefficients, and people get whipsawed.

What we actually try to do is use the impatience of the population of investors, who all of a sudden now are consumed with and obsessed with the macro. We try to use this to benefit our shareholders. As they are all, for instance, in the second quarter of 2010, concerned about European debt and they're all dumping European financials, then we'll buy them if they're good-quality businesses at the right prices.

For our investment style, in a perverse way, it's a positive, but for a typical investor, they are getting whipsawed by this and my recommendation would be, aim high in steering as they tell you in driver's ed, don't get caught up in the short-term variability and the white noise and in things that you cannot predict such as short-term macro trends.

Stipp: Given that you are looking at the business fundamentals, certainly some macroeconomic trends will factor into the cash flows for example that a business can generate or its sales outlook. How do you think about the macro when you are thinking from a bottom-up perspective? How do you incorporate that into your investment philosophy and make sure that a macro trend isn't going to perhaps impair one of the businesses that you've invested in?

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