Any discussion of a mutual fund eventually turns to the companies in its portfolio, and any discussion of those companies eventually turns to the world in which they operate.

Although it might be faster to look at a company’s numbers and compare its data with competitors’, we can’t do business in a vacuum.

Here’s an example. In response to the 42 percent downward spike in digital camera shipments this past year, camera giants Fujifilm and Panasonic are shifting their product focus to high-end cameras, while Kodak has repositioned itself as a company specializing in commercial and packaging printing.

These are two very different responses to a larger macro trend of consumers choosing to whip out their smartphones to take a picture, rather than fumble with a digital camera.

Whose strategy is the winner? You could argue that Kodak was smart to fold in the camera space when we see that even professional photographers are moving to the high-quality cameras that are now standard in most smartphones.

Technology trends are only one variable, though. We have to consider demographics: Millennials are the ones driving the smartphone camera trend, but buying top-of-the-line smartphones depends on income and, therefore, employment. So far, this generation can afford these phones and doesn’t mind spending the money. However, the employment outlook for younger adults is quite dismal. What does this say about future smartphone buying?

These numbers are the stuff of macroeconomics, and they are as critical to good investment decisions as a company’s internal numbers.

Taking in the Bigger Picture

When we make a macroeconomic assessment of a potential investment, we ask such questions as:

  • What are the political, regulatory, geographic, and economic influences on this company?
  • How is it affected by technology?
  • Does it do business in multiple countries?
  • How is each economy doing? Is it growing? Why?
  • What do its GDP, interest rates, inflation rate, unemployment rate, and median income tell you?

If it’s a consumer goods company, the trends in the unemployment rate and median income will affect how a company’s customers act. What are the demographics of those customers? If you’re thinking of investing in Procter & Gamble or Kimberly-Clark, for instance, it might be helpful to know what kind of diapers its brands manufacture when you consider that 97 percent of the world’s population lives in countries where the fertility rate is falling and that the world’s population is aging significantly.

The Dismal Science

I wouldn’t suggest adult diapers and economics for cocktail party chatter, of course. Eyes tend to glaze over.

And the truth is, it’s so much easier to analyze a company’s internal numbers. They are easy to find, and they seem clear-cut — which is just what we want in a world of information overload and too little time. At this micro level, we can chart a company’s earnings, year-over-year growth, cost of goods sold, P/E ratio, and product launches, and then compare the brand to other companies.

The macro view is messier. It’s harder to know which variables are important. Sometimes, we have to use our imagination to understand the important influences on a company. For instance, what if Company A and Company B are operating in a declining market or in an economic environment constrained by inflation or scarcity of talent? Now, we have to decide if the market has factored these into the price of the company’s stock and whether we should ditch both companies.

Starting with a Macro View

Occasionally, the macroeconomic perspective is the most important.

Let’s say one of your clients has just returned from a vacation in Greece, and he wants to invest in the tourism industry there. You could spend the day researching individual companies, but I suggest you start with a macroeconomic look at the country. It’s just now coming out of a tourism slump due to political and economic strife. International visits dropped 5.5 percent last year; hotel room rates fell 45 percent in the past three years.

What’s your judgment about the future of the Greece? Even if you’re optimistic, are there safer countries for investment?

The Questions to Ask

The amount of macro data available can be overwhelming. You can make it manageable by starting with a company and asking:

  • What does it do? How will its product or service be affected by the changes underway in the economy?
  • Where does it operate? The Midwest obviously has a different outlook than Eastern Europe.
  • With whom does it do business? Is it a specific demographic? How is this demographic doing?
  • What are the risks? Sure, a company can thrive in a bad environment, but go in with your eyes wide open.

If you’ve done your macro homework, you’ll better understand what a company’s executives are saying in their quarterly earnings calls. If they don’t seem to be worried about what you know, you should be.