Should Investors Care Who Wins The Election?

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.