Investors are as antsy as my fifth grader on report card day.
Morning television reminds them of the continuing government shutdown. The morning radio host reminds them of the government shutdown. Their favorite office-distraction websites remind them of the shutdown. The newspaper? Evening news? Nightly talk shows? You get the point.
We inhabit a hyper-politicized society with few performance standards. Democrats versus Republicans. Opposing ideologies, priorities and objectives. Zero performance benchmarks.
Human beings harbor nurtured political beliefs. Philosophical persuasions. Moral bents. We are subject to cognitive biases that subconsciously color our worldviews.
When making decisions, we rely too heavily on too little information (anchoring).
We tend to give precedence to more recent emotional events (availability heuristic).
We react to non-supportive evidence by further strengthening our current beliefs (backfire effect).
We interpret and recall information in a way that confirms our preconceptions (confirmation bias).
We place too much importance on insignificant events, distorting our ability to make effective future interpretations (focusing effect).
We draw different conclusions from the same information, depending upon how or by whom the information is presented (framing).
Our frameworks for decision making? One big, hot mess.
Good politicians know this. They benefit by these tendencies. Exploit them for political gain. Good investors, on the other hand, train themselves to avoid them. Lest they end up destitute.
Smart people vote for terrible human beings on the sole basis of party. In fact, political bias - voting for a candidate based upon party -- is the basis for any number of terrible choices. And a source of hope for terrible people who become aspiring politicians. Why else would Anthony Weiner stick around till election day?
A political candidate can admit to embezzling funds from his grandmother's knitting club. While drunk. And texting photos of his private parts to junior members of his campaign. But, we'll forgive him, because he's got some exciting ideas. The party is standing behind him. And he's better than the alternative.
Such bias does not harm just the voter, but all of society. Allowing weak, corrupt and deviant individuals to maintain careers. Because they belong to one of two political parties.
We call it "voting for the lesser of two evils." I call it pathetic.
When it comes to investing, clients must remain apolitical. Because capital is agnostic. As are good investors.
Capital markets don't care who is in the White House. Don't mind which party holds sway. If profits be your objective, then neither should you.
In fact, the priorities of capital markets are antithetical to those of politics.
Politics is words and emotion.
A politician gives a speech. Gets elected. Lies, cheats and steals. Gets caught. Begs forgiveness. Boldly pronounces the lessons learned. Redemption. Another speech. Re-election.
Markets are results oriented. Actions trump words. What was achieved? Words mean nothing.
A CEO makes a great speech. But, earnings fail to deliver. The stock falls. CEO gets fired.
Investors must remain apolitical. Become emotionally detached. Rely on process and methodology. From which springs sound investment decisions.
Markets are pricing mechanisms. They digest information and assign a value to intrinsic assets. Moving up when things look good. Moving down when things do not.
Successful investors profit by following strict methodologies that leverage consistently successful behaviors. The antithesis of emotional decision making.
Successful investment approaches are contrary to successful political campaigns. Unlike politicians, investors are effective when they:
Effective investment methodologies allocate capital to a variety of disparate, non- or low-correlated asset classes in order to lower risk and enhance returns.
Contrarily, politics is entirely focused on securing votes for one party, regardless of individual ' track records or experience.
2) Focus on sound pricing and valuation
Effective investment methodologies mitigate costs in order to enhance returns.
Whereas winning political candidates often spend the most money and then promise to further spend broadly on the district and constituents. Where investors prefer frugality, the electorate desires profligacy.
3) Dollar-cost average into a carefully chosen set of investment vehicles
Effective investment methodologies diligently choose specific asset classes and investment vehicles, and then allocate capital in a disciplined fashion.
Conversely, the successful politician spends capital on areas that deliver little social value, like campaign advertising, focus groups and pork barrel projects for influential constituents.
4) Keep expenses low
Effective investment methodologies are low-cost, results-oriented affairs.
Contrarily, politicians have little concept of the bottom line, balanced budgets, profits, bench marking or results.
5) Remain emotionally detached
Effective investment methodologies have no emotional attachment to any facet of the portfolio. They buy and sell on merit.
Contrarily, a politician's highest priority is to whip constituents into an emotional frenzy where sound reasoning and objectivity are trumped by party bias and antipathy towards the opposition.
6) Regularly rebalance portfolios
Effective investment methodologies will not allow one facet of the portfolio to become too big. Overweight areas are trimmed in order to mitigate risk and enhance performance.
Contrarily, a politician will jump on one, emotional hot-button that offers the most political upside and ride it throughout the campaign trail. Once elected, it may never merit another mention.
7) Avoid senseless noise and distractions
Effective investment methodologies focus on bottom-line data.
Contrarily, a politician will focus on whatever advantageous position the wind blows in, regardless of how off-point it may be.
8) Review strategic objectives and recalibrate tactics
Effective investment methodologies relentlessly focus on objectives and performance.
Contrarily, politicians rarely review progress because constituents rarely ask them to do so.
9) Avoid fads and manias
Effective investment methodologies stick to a proven process. Fads and manias? Distractions.
Contrarily, politicians will exploit any seemingly positive fad or trend, regardless of how far fetched.
10) Avoid proprietary products
Effective investment methodologies avoid "house" investments and internal products. Simply buying that which is perceived as most effective.
Contrarily, politicians and political parties ask constituents to buy entirely into the party's ideas, with no a la cart opportunities to pick and choose between good and bad.
11) Simplify, Simplify, Simplify
Effective investment methodologies are constantly re-tooled to remain simple, effective and repeatable.
Contrarily, politicians thrive on the complexity of the issues - even as they could be simplified were there the political will to do so... see healthcare, tax codes, defense spending.
Investing is process and methodology. Politics is sales without performance standards.
Let's analogize them as follows.
Politics is like missionary work. You're bought into a cause. You travel to an area where you're confronted with one of two types: those who are also bought in, or those you're seeking to convert.
Once converted, one never need be sold again. These are typically lifetime conversions. Because once an individual is converted to the cause, it's difficult to convince them otherwise. There are no performance standards, benchmarks or quotas. Converts will use every heuristic and bias to remain fully committed.
Investing, on the other hand, is like being the general manager for a baseball team. You have a budget. Objectives. Expectations. Opportunity costs.
As general manager, you stay within budget as you assemble the best team possible in an attempt to meet the team's benchmarks and objectives. You may love the team. You may love the individual parts. But, you remain emotionally detached. Because if any part of the team does not live up to expectations, it is your responsibility to replace it.
Each season, you benchmark your team against division rivals. If the team cannot compete - that is, perform at or beyond your benchmarks, you change the parts. Or, you will be replaced.
Investing is the constant, unemotional review of the players on the team. It is a meritocracy. Meritocracies demand methodologies. Process and procedural discipline. Emotional detachment. Elite players offering outperformance.
Investors can get emotional. Unlike politics, it is detrimental to success.
Finally, the most critical point.
Investors have a personal stake in the game. Their capital. Or that of a client. Once lost, it is gone. The investor is broke, or unemployed.
Our political process can be improved. Enhanced. Perfected. Made more to resemble a sound investment methodology. But, that change will have to begin from outside. Why would the politicians change a thing? For them, it works. But is it working for you? Your family? Children?
So long as politicians can bankrupt the nation while enriching themselves, they will avoid system enhancements. And for all of the work to be done, the electorate displays little will to get started.