Politics, Emotions and Investing – Three Things that Don’t Mix

We’re nearing the end of the political season and starting to see the light at the end of the tunnel from the onslaught of ads, flyers, and signs littering our neighbor’s yards. Politics have evolved into an emotional game as recent presidential elections come with heightened polarization, passionate rhetoric and intense social media debates. This emotional intensity can often overshadow policy discussions and rational decision-making.

Warren Buffet Said It Best

“If you mix your politics with investment decisions, you’re making a big mistake.” 

One of the most successful investors of all time, Warren Buffett, once stated that “if you mix your politics with investment decisions, you’re making a big mistake.” In our last post, we discussed how elections and the resulting policies do matter to the markets. But making investment decisions based on our predictions about political outcomes can be a hazard to our investment success.

Emotions Can Cloud Objective Reasoning

Politics are emotional, and once you let your emotions or bias seep into your investment decision-making process it can cloud your objective reasoning. Emotions and bias are probably the biggest driver of investment mistakes and is at the core of why we have the wild market cycles we continue to observe. The pendulum usually swings from extreme optimism to extreme pessimism on the foundation of our faulty human psychology. Our hard coding is for near-term survival, which is not always ideal for long-term money decisions.

As it relates to politically-based predictions, our emotions tend to allow bias to cloud judgement – to the point where the prediction is not so much based on what we logically think will happen, but rather influenced by what we want to have happen.

Confirming Our Beliefs

One condition we have observed frequently is the concept of confirmation bias. Put simply, it sets us up to only let information in that confirms our beliefs and disregard potentially conflicting, or disconfirming, information. Think about the news outlets you read, the TV shows you watch and the different pundits you listen to. You are what you eat (and read and watch and scroll). It is very difficult for individuals to predict a political outcome without being influenced by personal bias.

You Picked the Winner. Now What?

Even if you are pretty good at blocking out noise and bias and can objectively predict the outcome of an election, knowing whether that specific outcome will create a positive or negative reaction by the market is also quite difficult.

You are assessing whether the current political outcome (Democrats vs. Republicans) is beneficial for markets. However, there’s no significant data showing that one party is better for markets than the other.

Truthfully, the markets tend to do alright when there is political gridlock. Why? Because markets prefer certainty, and at least for a temporary period, business leaders know what to expect (or not expect) when little progress is being made in Washington. If businesses are confident in investing and hiring, we tend to see marginally better economic growth.

Investments In Any Political Climate

As for the NPF-run investment strategies, we continue to observe and assess the political and geopolitical landscape as things develop and make individual security selection changes where appropriate. We manage and mitigate risk by controlling exposures to companies and industries that could be adversely impacted by certain political outcomes (i.e. Healthcare or Energy). 

While the current political world is a highly-charge, emotional journey, our focus at NPF Investment Advisors is one based on data-driven research and your long-term success. We continue to focus on selectively buying high-quality, well-managed companies that tend to have a good track record in almost any political climate over the long run.