Avoid Mixing Political Opinions and Investing Decisions

Thursday, February 3, 2011

I am seeing more investors incorrectly use political opinions to substantiate their investing actions. Political beliefs are often emotionally charged, thereby skewing reasoning. The result: Poor investment decision-making.

Evaluating political actions’ can be helpful, but doing so carries three special challenges:

  1. The results of government actions on the economy and markets can be difficult to determine – both because the links are often tenuous and because the government actions can be altered in amount, time and implementation
  2. The reaction of others (e.g., businesses and consumers) can alter expected results, either diminishing or augmenting the effect of the government action
  3. Our view of government decisions can be biased by our personal filter, thereby skewing our analysis and conclusions

It’s that third item that we must guard against.

Example #1 – Expert analysis of a controversial subject

A promising sounding analysis yesterday was “The Nuts and Bolts of the ObamaCare Ruling” (The Wall Street Journal, “Opinion,” by Randy E. Barnett and Elizabeth Price Foley, February 2, page A-17). The two authors are constitutional law professors at respected universities.

In spite of their credentials and positions, they allowed their political feelings to color their analysis:

First paragraph: “For months, progressives smugly labeled the legal challenges to ObamaCare as ‘silly’ or even ‘frivolous.’ Today their confidence must be severely shaken.”

Last paragraph: “The Obama administration attempted to cloak an unprecedented and unsupportable exercise of federal power in the guise of a run-of-the-mill Commerce Clause regulation….”

Such biases produce tainted results that are unreliable.

Example #2 – Investment blogger’s altered market analysis

A popular investment blogger just allowed his political beliefs to alter his previously useful approach to analyzing markets.

Recent trades have not worked out for him, and the rising US stock market has left him with losses and out of the market. The main culprit according to him? The government and the Fed. His write-ups are now rants against their “misguided” actions. He says investors are being misled, and the result is buying when they should be selling.

Whether or not you agree with his political beliefs, his market analysis is now unusable.

Example #3 – Investors’ comments about bullish articles

SeekingAlpha.com has a large readership of articles selected from many investment writers. As a result, the comment sections for articles often contain many revealing opinions.

For articles with positive economy or stock market analysis, many comments are negative. The typical argument is that this government’s (and Fed’s) actions cannot be trusted – that they are improperly “buying” the gains we see.

For these commenter-investors, political feelings are keeping them from objectively analyzing and investing in the US stock market.

How will it end?

With history as a guide, the ending will be unhappy for those unable to separate political opinions from investment decisions. Such emotionally charged investing typically results in losses and lost opportunities.

So… Politics and investing are a challenging mixture. We need to ensure any decisions we make are based strictly on objective analysis – not political opinions. Leave those for the dinner table.

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