I was having
lunch last week with a client. We were
talking about the typical kind of commentary that investment firms tend to
write – particularly the blather about what the upcoming election means (or
doesn’t mean) regarding investing and investment strategy. Then he said something like, “You should
write something - it would be interesting.”
At the risk
of my own blather – I’m going to take him up on his suggestion. For what it’s worth, below are my thoughts on
today’s election.
Despite the
fact that making big bets specifically on the outcome of any event is a low odds proposition, deep
down we are all John Paulson wannabes (Paulson made billions betting the ranch
on the failure of the subprime mortgage market). Big wins like Paulson’s are exciting and make
for great stories. Less interesting, but
perhaps more important is that Paulson’s record since his big score is
dismal.
Nobel
laureate Daniel Kahneman provides valuable insight of what to do when faced
with what we think is a critical choice.
He suggests that before making any decision, to consider the base case. That is, given the historical data, what is
the most likely outcome? Headlines, commentary, our own (and our
friends’) opinions are powerful influences over our perceptions. Having a base
case helps ground our decision-making.
The base case of what happens after elections is mostly
inconclusive.
Whoever becomes President may
be a meaningful investment factor, but it isn’t meaningful enough to suggest
any kind of drastic investment stance (à la Paulson). The base case is that markets mostly muddle
through events and often respond in a
totally counter-intuitive fashion. While
some of us may think that a Trump victory would be a disaster for the market –
many of us thought the same thing in late 2012 about the impact of the fiscal
cliff. But when the fiscal-cliff actualized the
market rose 30% over the next twelve months.
As I was
thinking of this question, I thought of some important lessons I learned from
two well-known statisticians: Nate Silver
(politics) and Theo Epstein (baseball).
Silver came to prominence in 2008 when he accurately predicted the
presidential winner in 49 out of 50 states and every single Senate race,
following it up with a best-selling book (The
Signal and the Noise), and today has the “go-to” website for the current
election (www.538.com).
Epstein’s
accomplishment is even more remarkable:
he assembled the 2004 Boston Red Sox team that ended the 86 year old curse of the bambino by winning The
World Series, and then repeated the
feat with the Chicago Cubs this year – ending their 108 year drought. The irony is - while his feat seems so
improbable, it was achieved by maintaining a laser focus on probabilities.
The
commonality between baseball, politics and investing is that they are all data rich. Data rich enterprises lend themselves very
well to statistical analysis and probabilistic thinking. Epstein’s goal was to find the best
combination of players based upon the data –and then wait.
Nate Silver
gets his edge by continually updating his view of the world as the facts on the
ground change. His success at political
prediction is grounded in his willingness to let the facts form his
opinions. A dispassionate view of the
present is the most effective way to have clarity about the future.
Finally, I
think it’s worth repeating that the news cycle and the investment cycle are not
connected, at least not in any kind of simple deterministic manner. In terms of news – it is next to impossible
to keep our attention on more than one, perhaps two major stories at any one
time. But risk doesn’t have that
limitation – and we ignore that distinction at our peril.
The
implications of a Clinton victory or a Trump victory are not
insignificant. But they are a small part
of a larger web of investment risks and opportunities whose dynamics are the
focus my regular attention. There will
be plenty of time to evaluate, prioritize and monitor the implications of the
policies and/or personality of whoever becomes President – we just need to stay
present and dispassionate enough to see them, even if the news (and our
attention) is directed elsewhere.