On Investing: The Obamacare portfolio
By Barry Ritholtz,
October 6, 10:11 AM
Investors are best off when they leave their party affiliation and partisan views behind. I’ve said it before: “Washington, I’m here to tell you, politics and investing don’t mix. Your politics are killing you in the markets.”
Keeping your emotions — those primitive, thoughtless impulses — out of your portfolio has been a consistent theme of mine. Lately, that theme has reasserted itself over the issue of the Affordable Care Act, also known as Obamacare.
Regardless of your views of this legislation, if you want to be a successful investor, you must find a way to approach the process objectively. I don’t care if you are Sen. Ted Cruz and that in your day job you believe that the law is a job killer, the bane of the economy or the worst legislation the country has produced. When it comes to managing your portfolio, you need a cool objective approach.
I’ll give you three reasons: macro, psychology and opportunity costs.
We start with macro, or the strategy of investing based on political and economic trends across countries. Making specific investments from a 30,000-foot view is exceedingly difficult. There are myriad moving parts, all of which interact with the economy and corporate profits in a complex and unpredictable way. Elements can change suddenly. Politics are fluid, alliances constantly shifting and public opinion malleable. The political macro analysis often turns out to be less of a true investing idea and more of wishful thinking.
Former International Monetary Fund economist Mark Dow has pointed out that even the best hedge fund managers using the macro approach have done poorly. We call this the curse of the macro tourists, in which formerly talented fund managers ignore valuation and earnings data to build an investment thesis around big macro themes. There are simply too many unknowns and, to be blunt, way too much cognitive bias for this strategy to succeed these days.
Indeed, emotional investing is rarely successful. Anyone with an intense emotional interest ignores data and facts that disagree with their views. The brain’s tendency to more easily forget that which we disagree with also works to fool these folks. Cognitive bias is a source of systematic errors to investors of all political persuasions – and it leads to under-performance.
Advice for Ted Cruz
Regardless of Cruz’s fiery oratory or partisan affiliation, after a long day of standing on his feet (21 hours!), when he sits down to review his portfolio, he should put his politics aside for the sake of objectivity. If you want to be smart investors you should consider all aspects of how the insurance mandate of law will affect different sectors of the economy (including the companies within those sectors). This is simply an objective approach.
When the health-care law was passed, my team did just that: We sat down to discuss exactly what impact it might have. Not the politics or the electoral implications, but what result this was likely to have in the real world. We came to several conclusions:
• The nation was going to create up to 50 million new health-care consumers;
• Demand for medical services and equipment was likely to rise;
• Innovative pharmaceuticals, procedures and techniques would also see increased demand;
• Hospitals would no longer be on the hook for free emergency room services, as they have for almost 3 decades.
What’s that you say? Hospitals are mandated to give away free services?
Yes. In response to some earlier bad behavior from hospitals called “patient dumping,” a mandate for unfunded medical care was created and signed into law by President Ronald Reagan in 1986. The Emergency Medical Treatment and Active Labor Act (EMTALA) said, “Hospitals provide care to anyone needing emergency healthcare treatment regardless of citizenship, legal status or ability to pay.”
That’s right, Reagan created a universal coverage mandate, forced the private sector to pay for it, thereby creating the world’s most expensive, least efficient health-are program. Hospitals hated it, the poor and indigent took advantage of it, and prices were jacked up in response to it. Eventually, the costs spread to everyone else.
Given that history, it is no surprise that hospitals were quietly pleased with Obamacare. After the Supreme Court ruled on the legality of the new rules in June 2012, hospital stocks rallied. It should come as no surprise: They get to remove a huge cost that they had no ability to control. They also get a massive number of new paying customers. And they now have some control over who their patients will be.
So we considered all of these issues objectively. Once we put aside our emotions, the investments were obvious. If I could have sat with Cruz three years ago, here is what I would have suggested that he do with his portfolio:
• Overweight the health-care sector. I always prefer using exchange-traded funds, or ETFs, to individual stocks, and in this case, the Health Care SPDR (ETF) was a good choice: It is filled with pharmaceuticals, insurers and hospitals;
• Investors who prefer individual stocks should consider either the large pharmaceutical companies or medical-device makers. Larger firms such as Merck or Sanofi should be on your radar; Johnson & Johnson has sells into the consumer market, makes pharmaceutical and medical devices, and yields almost 3 percent;
• For more aggressive investors, the SPDR S&P Biotech (XBI) owns the largest biotech, genomic and therapeutic companies.
Regardless of your viewpoint, the broad Healthcare Index has done well since the March 2009 lows — and has done nothing but go up since the Supreme Court’s ruling on Obamacare.
The politics of Obamacare are complex, confusing and partisan. The investing theses — and results — have been anything but.