Never Bet On Our Government


Posted in: Economics, General, Stock Market, Thought of the Week

In the summer of 2012, the Investment Committee made the decision to sell all coal stocks and buy solar energy stocks only if President Obama were to win a second term in November of that year.

Our thesis was predicated upon the belief that if Obama were to win re-election, he would lead a gruesome attack against the coal industry. The Democratic Party dislikes coal because the pollution created from power plants fueled by coal is an environmental concern.

As we moved closer to Election Day, we became more certain that Obama would win, but we still remained disciplined and waited for all the votes to get counted. We finally made our move the day after the election, and the chart below shows the results of our strategy since November 2012:

The chart above shows that our investment strategy worked very well. The red line indicates that the coal sector is down over 30% and First Solar (ticker: FSLR) is up over 130%, which was one of our better performing stocks over the last two years.

Imagine if Obama had lost and the Democrats never waged their war against coal. It’s pretty safe to say that this chart could look dramatically different, which shows just how much impact a government election carries at times.

When the distribution of outcomes is this large and highly dependent upon a single event that is nearly impossible to fundamentally analyze or predict, investors are best suited to be patient and have a plan for either outcome.

 

Implications for Investors

Buying and selling stocks whose future is dependent upon a governmental ruling or election is pure speculation and is highly discouraged. For example, purchasing shares in a biotech stock prior to their only drug getting approved by the FDA is incredibly risky because the government has full authority on the outcome.

NOTE: Take a look at the stock chart of a biotech company that did not get approval for a drug, or even one where the FDA delayed their ruling for a few months. A stock can easily lose 50% or more in a day if the company’s future depends on that drug.

The Investment Committee could have done much better had we implemented our solar strategy months before the election, but we felt that the risk was too great simply because there was no way to fundamentally assess whether Obama would win his second term with absolute certainty.

Instead, we devised an investment plan that was expected to perform well if Obama won, and we also had a plan in the event that he lost. Therefore, we remained disciplined, politically agnostic, and shielded portfolios from the risks associated with an unexpected outcome.

The bottom line is that you should never underestimate the government’s ability to create or destroy businesses, nor should you assume that Uncle Sam is either logical or fair when they enact new laws. Check your politics at the door, and remember that the goal of investing is to make money. Don’t make this already difficult task more complicated by mixing powerful emotional forces into the equation.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.