The Dangers of Investing via Politics

“For the economy and financial markets, the stakes in the coming presidential election are vastly lower than nearly everyone is making them out to be.”

-Mike Santoli, Barrons

 

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Earlier this month, I was on a cruise in the Baltic Sea with Forbes where I gave a presentation on Behavioral Economics & Neurofinance.

Prior to that event, we were having dinner onboard with a table of HNW investors. One of the women at the table went off, spouting nonstop about politics and the upcoming election. She had missed a 109% rally in equities due to her politics, and was convinced that if her candidate won, all would be right in the world.

Sure it would.

What she really needed to do was see the slides 16, 17, 18 and 19 in that presentation about mixing politics and investing (alas, she chose to miss it). The slides shows how Democrats and Republicans alike who invest based on how they vote miss enormous opportunities. They under-perform so badly you would think they were a Day Trader circa 2001.

This has been a pet peeve of mine for a long time. Indeed, my very first column for the Washington Post was titled Why politics and investing don’t mix. And I have addressed this subject repeatedly on the blog.

All of which is to say I indulged my confirmation bias and enjoyed Mike Santoli’s column this weekend (Less Than Meets the Ear) a great deal. Mike points out in the quote above that neither candidate is likely to make any wholesale changes to any major policy, and that your tax rates are likely to be higher regardless of the election outcome. I agree.

One last point worth making: Too many observers Confuse Cause & Effect when analyzing politics and markets. When the economy is doing well and profits are expanding, stocks tend to do well also. These conditions work to the incumbent’s advantage. When the economy does poorly and earnings suffer, it works to the challenger’s advantage. There are some issues with timing and lags, but that is the general relationship.

The usual tail-wagging-the-dog suspects gets this relationship precisely backwards . . .

 

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Previously:
Confusing Cause & Effect: Elections and Markets (January 9th, 2008)

Presidential Blame & Credit (November 22nd, 2011)

What do the markets have to do with the election? Not much (January 14, 2012)

Complexity, Context, Probability & Bias (March 27th, 2012)

Source:
Less Than Meets the Ear
MICHAEL SANTOLI
Barron’s July 14, 2012   
http://online.barrons.com/article/SB50001424053111903431804577508921053002152.html

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