Don’t Let Politicians into Your Investment Portfolio
By Alan Ebright
To be a successful investment professional, you need to read a high volume of information. Over the years, I’ve relied on a handful of commentators whose words I find provocative. Howard Marks of Oaktree Capital is one of them. His July letter, titled “The Folly of Certainty”, was both entertaining and a reminder of the flaws inherent in the prediction game. As humans, we tend to run on emotions and have been hardwired since the dawn of time with fear and greed impulses. We all wish we lived in a world of certainty, but the further one projects into the future, the less certain it can look. If you add money to the equation, our desire to know what will happen becomes even more pronounced.
Come this November, we’ll elect a new president. In the interim, the media will be deliberating, virtually nonstop, about the outcome. We’ll hear theories from all the pundits and media darlings as to who will win and why. There’ll be countless prognostications about what the world will look like under each candidate, and we’ll also hear myriad opinions, from the so-called “experts”, about what will happen to the stock market. I wouldn’t recommend putting much faith in any of them.
It’s common for people to think that an election outcome directly affects capital markets. However, markets and politics are separate phenomena and shouldn’t be commingled to forecast an outcome. As investors, we partner with businesses through share ownership when we buy stock in a company. We don’t pay much attention to what the overall market is doing or its manic-depressive tendencies. Benjamin Graham, the grandfather of value investing, describes this behavior as his “Mr. Market” allegory. Mr. Market’s valuations are driven by emotions, not logic. It can be overly optimistic one day and fearful the next, and politics only exacerbates its erratic nature. Therefore, we feel it’s better to focus on gaining more insight into the inner workings of the companies we own rather than paying much attention to political sentiment.
Each company has a management team that’s acutely aware of the economic and political climate, and they’ll adapt to any temporary roadblocks by tweaking their business strategy. Eventually, talented managers tend to figure out how to drive higher sales and earnings—and therefore higher stock prices—regardless of who sits in the Oval Office. We continually remind clients that we want to own great businesses at attractive prices. These businesses are almost always profitable regardless of politics. Frankly, they probably can’t be defined as good businesses if politics has much of an effect on them.
For some wise thoughts on this matter, let’s defer to Warren Buffett. His investment career has seen 14 presidents, half from each party. He made mention several times how he’s heard for decades that “If the other party wins, we’re going to hell in a handbasket.” Over time we’ve witnessed that this statement holds no merit. Bottom line: If you factor politics into your investment decisions, you’re making a big mistake.
Contact Check Capital at (714)641-3579 or info@checkcapital.com to learn more.