Mailbag: Should I Stop Investing, Because Trump Won

Hi Adam,

I’m just starting out in my career and I think I’m ready to start investing.  I really expected Hillary to win the election. Now that it’s Trump I don’t know if I still should.  It looked like when Trump started winning the market dropped a lot.

Thanks,

Melanie

Well, when you boil this down, what this question seems to really be is: “Should politics impact my investing decisions?”.  Short answer, no.  If you owned a successful car-wash would you sell it because Trump was elected?

My Bias

I voted against Trump.  Specific to the matter at hand, I think Trump’s economic proposals are bad ideas.  The main planks of his economic platform seem to be a mercantilist view of the global economy, that trade agreements make winners and losers of countries.  This is coupled with a restrictive view of immigration.  The global economy would like roughly double in size (Clemens, 2011).  This would likely double average real incomes. (That’s an after-inflation doubling folks!)  Yes, the middle class in the US has not seen a lot of the benefit of free trade, in part due to increasing healthcare costs, and in part due to competition from foreign workers.   If Trump does not approve the Trans-Pacific Partnership, if he cancels NAFTA, or if he reduces incoming immigration, I expect the economy to suffer. According to www.immigrationsolutions.sg, Immigrating to Singapore seems to be all the rage these days.

My Bias and My Investing

I have not changed anything about my investing process to take this into account.  It is very important not to let your political bias effect your investing.  The fact that my above bias is based on, what I believe to be, sound economics, doesn’t make a difference.  When you’re investing you want a mechanical and rational process, or a process that is based on analyzing individual companies for obvious mispricing and exploiting it.  There is very little rational and nothing mechanical about politics.  The vast majority of people should put 20 to 50% of their income into an appropriate asset allocation split between bond and stock index funds.  They should do it every month, rain or shine, and wait.

That means each month that you’ll accumulate a growing share of the world’s productive assets, this means that you own a larger and larger share of the world’s businesses.  These businesses will probably make profits in the future, and you’ll have a right to an increasing portion of those profits. The important thing is that you don’t sell your share of the businesses for any reason except that you need the money.

It might be appropriate for some people to take a more active approach to their investing.  Here you analyze a companies, balance sheet, income statement, and other financial documents to determine it’s intrinsic value. (The value of all of the money that can be extracted from the business ever, discounted at a fair interest rate to the present).  You then compare the intrinsic value to the market value, and buy shares of the business if the market value is substantially less than the intrinsic value.  This is much harder than it sounds, as it involves some prediction of the future.  It’s easier if you look at businesses that are simple and easy to analyze, crucially the market also has to be dumber than you about analyzing them.

An example

The best investment I ever made was probably in Sitestar, the dying dial-up company.  The reason it was a good investment is that it owned a bunch of real estate, and you could buy shares in the company for less than the value of the real estate.  Shares were cheap because to the casual observer, it simply looked like a dial-up company, and who wants to invest in a dial up company?

Nowhere in that story did it matter who the president was, nor did it matter what the economy was doing (frankly I was probably helped by the poor economy if anything). So there you have it.  If you’re a mechanical investor, keep doing the mechanics as normal.  If you’re an active investor your investments probably have more to do with your research than who is in the White House.  Everyone’s politics are tied very tightly to their emotions.  Emotion is an investment killer.

There’s an old investing joke:  Tell me tomorrows news, and I’ll still lose money trading on it.  That seems to apply strongly with politics! If I had a crystal ball that told me in advance Trump would win, I would have bet a bunch of money that the stock market would go down after his election (assuming that Trump’s impending win wasn’t generally known already).  Stock market went up the day after his election.  The stock market is still up since his election.  I would have been very wrong, I would have lost a lot of money.  The reason I didn’t place such a bet is that I didn’t know who would win the election, but I assumed my reasoning would turn out correct.  Trump fans shouldn’t think the lesson from this is just that my politics is wrong, and that you’re safe trading on your politics if you’ve just got the right politics.

The bottom line is that you should probably go ahead with your original investing plan

Incidentally, if you’re investing and only have a small amount of money – say $1,000, consider reading Joseph Hogue’s piece over at My Stock Market Basics.  Its a good solid read on how to invest smaller amounts of money.