Ignore politics – only one thing really matters in investment

By John Stepek

published 27 March 2018

in Features

180327-putin-b — Russia's causing mischief. But what's new?

Russian diplomats being expelled across the globe.

Trade wars threatened between China and the US.

Post-election chaos in Italy. Strikes in France. Arrests of dissident Catalan politicians.

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All this politics all of a sudden! How's an investor to cope?

The answer is simple focus on the one thing that matters.

Cut down on your news habit

It's easy to get distracted by the headlines. We've gone from a period in which individual politicians were fairly interchangeable, even across countries, never mind parties. They broadly looked the same youngish, well-groomed, nicely spin-doctored. And they held broadly the same views pro-globalisation, pro-free trade, but in a "nice" way.

Now we are afflicted, globally, with a cast of far more colourful characters with far more colourful views, not all of them terribly palatable.

But this is just another phase. That's the nature of life it's cyclical. The one thing you should always remember (in my opinion) is that the core benefit of democracy its USP is that it accommodates these cycles without the need for anyone's head to end up on a spike. That's it. That's all you can expect from it and it's all anyone really needs.

These useful idiots who say: "If democracy ever changed anything, they would ban it" don't get that. You get your say, change happens incrementally sometimes faster than others, but always at a manageable pace. You might feel frustrated sometimes, but no one ends up in a gas chamber or a gulag or a tumbril. If you ask me, gazing back across human history, that's a pretty good deal.

Anyway what does the "return of politics" mean for your investing? How are you meant to account for all of this chaos into your process?

The fact is, you're not. Most of it, you can just ignore.

Seriously, what's changed? Russia's causing mischief. China and the US are locked in an uneasy balancing act between the pre-eminent superpower and the rising power. Britain is tying itself in knots about its relationship with Europe. There's trouble in the Middle East.

Hard to imagine a decade in modern history where variations on those sentences or those precise sentences themselves wouldn't have been applicable.

The thing you have to remember about journalists and writers is that we're basically professional gossips. We love a good story and we love to find "themes" that we can use to pull together apparently disparate events into one grand theory.

That's how human beings work. We are pattern-spotting machines. Whatever you turn your attention to, you try to spot patterns try to spot a system, a way to make the world more predictable.

Sometimes that works well in the formulation of testable scientific hypotheses, for example. But often, it only adds to the noise (indeed the strength of the scientific method is in its efforts to separate white noise statistically insignificant events from genuinely useful signals). And most of the time, when journalists do it with news events, it only creates extra noise rather than useful analysis.

So try to ignore the melodrama in the headlines. Some of the stories are enraging. Some of them are shocking. Most of them are depressing. Almost none of them will help your investing.

My advice would be to curate your current affairs reading material very carefully. Whittle away as much as you can. Experiment with news-free days. Take the time in which you'd read a newspaper and read a book instead. I'll warrant you'll be happier and better informed for it.

(In fact, I can recommend our sister publication, The Week, if you want to stay informed while avoiding a daily paper. I imagine a lot of you get it already, but check it out here if you don't already.)

What really matters to investors

What does matter when it comes to investing is the price.

When you want to invest in anything, you should be thinking: "What is this worth?" Then, you should be looking at the price you can get it for. If you can get it for a lot less than you think it's worth, then it's a buy.

Specific political events may affect your assessment of an asset's value, certainly. For example, in pricing Facebook right now, you really need to take account of the fact that regulators are actively taking action and that the fines the company faces could be very high indeed. But the intricacies of the Italian election? They don't matter so much for pricing Facebook.

It also goes back to what we were talking about yesterday. British stocks are widely hated. That's because there are easy-to-understand "big picture" reasons for professional global investors to avoid the UK.

But looked at on an individual basis, that means there are bound to be some stocks that are undervalued as a result. They are being entirely ignored by investors who would otherwise be interested, for political reasons that may not even affect them. Merryn and I discussed this and ways to play it on the podcast yesterday you can listen to that here.

My point is, don't start with the headlines. Find assets that you believe look cheap, then dig deeper to see if they're really on sale or not. Don't start with the macro stuff and then lose your head worrying about whether or not you need to be buying or selling in response to Donald Trump's latest Tweet, or Europe's latest electoral stalemate.

You might ask: but John, what if there's a nuclear war? My response to that would be: why would you care for a second about what was happening to your portfolio in that scenario? Some things can't be planned for in those terms.

(My follow-up response would be: to be fair, in terms of pure investment assets, that's why you'd own physical gold. Preferably nearby.)

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.