Moving On

As I mentioned in my last post, I’m imposing a hard close on several pending comments, which responded to my last few election-related posts.  Those comments won’t appear on the blog.

I plan to make a pretty abrupt turn from the political themes of the last month or two toward more explicitly investment-related content.  As I make that pivot, I’d like to address the issue of politics and investments again.  As I’ve said before, I think strong political views have the potential to contaminate and even compromise investment practice in several ways, both obvious and subtle.

The first danger is that my political views, or those of the other three voting and four non-voting members of our Investment Committee, might in some way distort our thinking process and thus cause us to make wrong-headed investmentl decisions.  So far that has not happened, I think for two reasons.  First, as a matter of philosophy we are all quite adamant that politics is mostly a distraction from investment practice.  Second, within our firm we have some pretty basic disagreements about politics; if one of us tries to bring his politics into the investment process, someone else will push back.

That rarely happens.  More often, we find that some of our best investment insights are a function of reasoning against our own political prejudices.  One example is a discussion we had last year about whether to buy heavily into Jeremy Grantham’s argument-from-scarcity about commodities, and make a much larger commitment to an asset class without intrinsic economic return.  It was Marvin, the political liberal, who put on his economist’s hat and argued that market forces would act to moderate or reverse rising commodity prices.  We chose not to increase our passive commodity index holdings.  Marvin was right, and commodity prices actually declined.

The second danger is that, even when we at TGS get our investment policy decision right, an individual client’s political view could still cause him to depart from our investment strategy at a key market inflection point.  We saw that in 2008 and 2009.  We had fewer than ten clients out of more than 240 sell out near the market lows, but most of those were politically conservative.  Their political viewpoint compounded their worries about the scary market decline, resulting in a level of panic that made immediate liquidation appear the only survival option.

Selling out in fall of 2008 or spring of 2009 was the single worst investment decision I have seen in my thirty years of practice as an adviser.  How bad?  As of the end of October of 2012, the market was up more than 100% from the 2009 low.  So the small number of folks who sold because their politics informed their investment decisions made a life-changing economic mistake.  Looking across our practice, those clients who were with us in March of 2009 and remain with us today have portfolios worth in excess of $100 million more dollars today than they had back then.  In a real sense, that $100 million is the result of following our advice.

Which brings us to the third place where politics intersects with investments, the most subtle but potentially the most important.   The few who sold were not the only ones gravely concerned about the worst market decline in seventy years.  We did lots of hand-holding during that brutal six month market panic.  Every client who considered selling out, told us so, engaged in dialogue with us, and ultimately took our advice not to sell, was not just buying into a rational argument.  They were also basing their decision on their emotional bond of trust with us.

That is where a focus on politics can be really dangerous.  If a political discussion alienates a client from me as their advisor; if a political disagreement damages that essential human relationship, then it could have a profound economic cost.

As a Registered Investment Adviser, I have the same fiduciary obligation to every one of my clients, regardless of whether our political opinions are similar.  I owe the same duty of prudent and expert advice to the client who is a retired schoolteacher, whose union membership delivered the retirement package that is a foundation of his financial security, as I do to the successful entrepreneur whose private company is the foundation of her family’s wealth.  I have the same commitment to the politically-liberal retired physician, who was always happy paying high income taxes, as I do to the politically-conservative surgeon who sees taxes as the primary obstacle to building financial independence.

I owe precisely the same advice to all of them, and keeping a relationship of trust is a key part of what makes my advice effective.  Too much time thinking about politics could damage my thinking, but it could also damage my relationships.

In my mind, doing my job as well as I possibly can requires me to keep my level of political engagement below a certain threshold.  With several of my recent posts, I think that I have crossed an invisible line.  You’ll see me walking it back in the coming weeks.

That does not mean that I will ignore the intersection of government policy and market trends.  For better or worse, that linkage will be with us for the foreseeable future.  But I intend to look at those issues as much as possible through a non-partisan lens.

Here’s a link to a short political video that my kids showed me the better part of a decade ago, during the 2004 election cycle.  Though it is a bit off-color, I think it is very funny, and does a great job of equal-opportunity skewering of both major parties.  I hope you enjoy it.  After you watch, I think you’ll understand what I mean when I say that all of us, from liberal wieners to right-wing nut jobs like me, need and deserve the best possible financial advice.

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