The finger and the Moon: elections, focus and long-term thinking
Henning Stein, PhD, GCB.D
Results-Oriented Investment Solutions Executive | Certified Board Member | Asset & Wealth Management Change Agent | International Presenter & Author
Timing and time
I wrote earlier this month that elections, rather than encouraging us to evaluate the accomplishments or failings of a particular politician, should compel us to reflect on the state of politics as a whole. It appears that these events also compel many investors to reflect on the state of their portfolios.
One of my colleagues at Invesco, Global Market Strategist Brian Levitt, has recently produced several excellent blog posts in response to this phenomenon. Specifically, he has sought to deal with concerns about how the US presidential election might influence asset allocations.
His argument, to put it bluntly, is that there should be no significant influence at all. History suggests that the outcome of an election does not matter to the markets nearly as much as many people suppose.
Consider, for example, the equity performance witnessed during the tenures of the past eight US presidents. Gerald Ford, Jimmy Carter, Ronald Reagan, George HW Bush, Bill Clinton, Barack Obama and Donald Trump all presided over double-digit annualised returns. Only George W Bush, who bowed out at the peak of the global financial crisis, could not claim success in this regard.
So it did not matter whether the Commander in Chief was a Democrat or a Republican. It did not matter if he was a dove or a hawk. It did not matter if he dealt in epoch-defining oratory or off-the-cuff rambles. What really mattered, if anything, were the dominant demographic trends that he inherited.
The basic lesson is a familiar one: time in the markets beats timing the markets. There is dubious merit in attempting to second-guess the immediate impact of a geopolitical event, because portfolios more often than not prosper to best effect only if they remain invested over the longer term. As you can see in his articles, Brian has at his disposal a wealth of data to demonstrate as much.
Yet there is another, related lesson – one that underscores the vital distinctions between judiciousness and intuition, between insight and “noise” and between reasonable probability and blind luck. And this lesson begins with a fundamental question: what is investing?
Investing, speculating and gambling
For asset managers, not least since the events of 2007 and 2008, investing has become a resolutely long-term proposition. Such an approach has also been embraced by the overwhelming majority of clients, especially the likes of pension schemes, sovereign wealth funds and other institutions. Short-termism’s record, it is fair to say, is in the tank – and deservedly so.
It therefore seems curious that some investors still devote so much effort to trying to anticipate short-term effects. This attitude is in some ways understandable – and maybe even distantly commendable if it stems entirely from well-intentioned caution – but it is not investing per se.
Rather, it is speculation. It is unduly reliant on belief – to use the word loosely –or even suspicion. It draws heavily on feeling and gut instinct. Not for the first time, the words of astronomer and cosmologist Carl Sagancome to mind: “I try not to think with my gut. If I’m serious about understanding the world, thinking with anything besides my brain is likely to get me into trouble.”
Beyond this, though, lies something even more illogical. Imagine that in the run-up to the US presidential result, a day before the winner is declared, an institution suddenly senses that its preferred candidate will lose and withdraws from the markets to allow for a “cooling off” period; and then the next day, against all expectations, the preferred candidate actually wins.
This, too, is not investing. Nor is it speculation. It is gambling. It is the stuff of gaming machines, roulette wheels and the turn of a card. Experience, available facts and what we might call informed opinion rarely figure in the reckoning.
Naturally, even long-term investing involves a combination of strategic and tactical allocations. Positions are necessarily adjusted with frequency, and there are even occasions when asset managers may use a degree of “feel” – usually one born out of recognising comparable situations that have occurred in the past.
Yet there comes a point at which scattergun chopping and changing inevitably challenges the limits of both risk tolerance and rationality. And these are boundaries that responsible, long-term-focused investors should not cross.
Beyond the imminent
It would be misleading to present a definitive taxonomy, as there are exceptions to every rule. That said, by way of an approximate guide, we might tentatively suggest that a financial outlook principally measured in years tends to constitute investing; that one principally measured in months or weeks tends to constitute speculation; and that one principally measured in days or less tends to constitute gambling.
We can return to Brian’s earlier observation about demographics for a further illustration. Of the seven US presidents previously mentioned, the two whose terms of office coincided with the most potent equity performance were Reagan and Obama – whose similarities, a notable capacity for speechmaking aside, are less than dazzlingly obvious.
So what did this apparently discordant duo have in common? Each was elected during a recession; each took the oath at a time when equities were historically cheap; each benefited from monetary policies intended to revive an ailing economy; and each, crucially, came to power as millions of new workers – baby-boomers in Reagan’s case, millennials in Obama’s – were entering the workforce.
Next January, irrespective of which of them is sworn in, Donald Trump or Joe Biden will very likely enjoy comparable circumstances. This should count for much more than their respective ideologies, their personal hopes and dreams or whether either of them is able to string together a cogent sentence in the absence of a teleprompter.
Equally, China’s longer-term fate is unlikely to rest on whether Washington and Beijing are capable of exchanging diplomatic pleasantries from one week to the next. It is far more liable to be determined by entrenched and abiding factors such as youth, infrastructure and brainpower. Genuine investors should be more interested in where China will be in 20 years, not 20 minutes.
It is easy to be distracted by the imminent and the close at hand. Indeed, they may sometimes merit substantial attention. But there are very few instances when they might realistically be allowed to derail a sensible, well-informed, long-term strategy.
As Bruce Lee famously told his pupil in Enter the Dragon: “It is a like a finger pointing away to the Moon. Don’t concentrate on the finger, or you will miss all that heavenly glory.” To use a less Buddhist idiom: ultimately, at least for investors, the bigger picture should almost always take precedence.
Disclaimer: I work at Invesco. All views and recommendations in this article are solely my personal opinion. They may or may not coincide with company opinion but should never be interpreted as Invesco company statements.
Links
Invesco Blog: “Brian Levitt, Global Market Strategist”
https://www.blog.invesco.us.com/author/brianlevitt/
Invesco Blog: “What Presidents Reagan and Obama have in common: healthy stock markets during their terms”, 1 September 2020
Invesco Blog: “It may not pay to avoid the market in the early days of a new administration”, 16 September 2020
OpenMind: “Carl Sagan, the defender of critical thinking”, 8 November 2017
YouTube: “Finger pointing to the Moon – Bruce Lee”
Global Market Strategist at Invesco
4 年Thanks for sharing, Henning!?
Multi-Skilled Business Advisor & Executive | Experienced Entrepreneur | Business Development | Marketing | Risk Management | Strategic Planning | Speaker | Traveler |
4 年Yet the trading patterns of the markets of 2020 show otherwise as does the clear rise of platforms such as Robinhood, to the detriment of the name markets IMHO.