Regardless of where you fall on the political spectrum, I think we can all agree that Trump’s fiscal and foreign policy is a sharp change from what we’ve seen in recent memory – including during his first term.
Like any political issue, it’s not difficult to make arguments both in support of or against these policies. The republican perspective is that we are on a long term collision course with China. Our supply chains are spread across the world thanks to decades of receding trade barriers, which provides low cost goods and services for Americans. It also leaves us susceptible in any sort of conflict, as it would not be difficult for China to sever many of these chains around the world. Tariffs are a convenient way to simultaneously force manufacturing back onto U.S. soil and raise a little revenue along the way. Which theoretically would help narrow the budget deficit.
The main democratic perspective is that these actions crush economic growth. Not only are we going backward by imposing tariffs, we’re antagonizing all our neighbors and friends we’ve worked so hard to build alliances with over the last 100 years. Tariffs can lead to inflation, stalled growth, recession, job losses, and more. And although no one likes the idea of government waste and inefficiency, the dismantling of our federal institutions creates chaos and unnecessary pain. Not to mention the possibility that policy insiders are front running policy announcements for personal gain.
Are there holes in these two summaries? Of course! Has the white house executed the republican perspective cleanly and consistently? Absolutely not! Bear with me for a moment before you start yelling at your screen.
I bring up the above summaries to remind us all that there will always be rational arguments on either side of any policy, and that as prudent investors we should not allow our personal politics to greatly influence our investment decisions.
Media & Diversification
We live in an era where there are no longer objective news outlets. The business model of media has evolved to a point where outlets cannot survive without capturing our attention for as long as possible. Gone are the days where we all hear the same objective message at the same time from a trusted anchor like Walter Cronkite or Tom Brokaw. We now consume our news from a mix of tv, social media, podcasts, radio, and the occasional water cooler conversation. And unfortunately, the algorithms are engineered to present us with information we’re most likely to keep our eyes glued to.
In short, we live in a world where we’re told what we want to hear. Not what we need to hear. It should be no surprise that if you’re obtaining your news from Fox every day, you’re hearing a different agenda than if you tune into MSNBC.
This presents a problem to us as investors. We access the stock and bond markets as investors because we want our future selves to have options. Retiring at 65 & drawing $7500 per month from your portfolio. Buying a vacation home. Sending the kids to college. Whatever your personal motivations, investing is simply an action that sets resources aside today so that you’ll have more options in the future.
At our firm, you’re already aware that we take a long term perspective, believe strongly in global diversification, and don’t pretend to know what will happen in the markets next week. It’s the only rational perspective to have and gives me, by far, the most confidence that our clients will reach the best outcomes.
By “global diversification,” I mean that there are around 15,000 different individual publicly traded companies around the world that we can invest in at a reasonable cost. Each one of these companies has a CEO at the helm, whose job it is to drive revenues and profits for the benefit of shareholders (that’s you). That CEO is hired & monitored by a board of directors and fired if they underperform. And the shareholder base (you and other stockholders) have the opportunity to vote out board members if you want to. It’s a beautiful system of checks and balances, all designed for your benefit as a shareholder.
Within each of these companies is an executive team of smart, talented, people who are incentivized by the performance of the company. A large portion of their compensation is in company stock, and they want the company to perform just as badly as you do. Probably even more so, since their own career options depend on company performance. The members of these elite groups are the 1%ers. They’re highly educated, high IQ achievers. They live in the nicest neighborhoods, drive nice cars, and spend the most money at their PTA fundraisers.
Now zoom out to the 15,000 different companies we can invest in around the globe. Think of the talent on the executive teams of these 15,000 companies. Think of the unique ideas, the savvy, and the problem solving abilities found in this group. The way we should view all this is that by investing in the entire set of 15,000 corporations you’re harnessing a huge portion of human ingenuity. The decision makers in this group all want the same thing – career and economic success. This entire crew is pulling in the same direction you want them to – toward the company’s financial success.
Tariffs & Markets
Now onto the markets. Markets are big voting machines – not the Wizard of Oz. Buyers and sellers in the markets are simply voting on the future cash flows of different investments. Corporate earnings, dividend distributions, bond interest and other cash flows are all part of the package that gets voted on during the trading day. I read a great quote recently to the following effect “Markets cannot be indicted. They cannot enact policy or wage war. They cannot be hired or fired. They cannot be canceled. And they cannot win the world series. They’re simply a mechanism.” For us as investors, this simply means we have a mechanism able to tell us what other voters think these 15,000 companies are worth at any given time.
For all the disruption over the last few months, you probably own the exact same 15,000 companies that you did before tariffs were announced. They’re still the same CEOs, same boards, and same executive teams delivering the same products and services as they were a few months ago. The only difference is that some other voters in the marketplace have changed their opinion of future cash flows. We don’t know whether these other voters are humans, institutions, endowments, oligarchs, bots, or aliens. And we definitely don’t know what their motivations, time horizons, risk appetites, or tax situations are.
Could the future cash flows of these 15,000 be impacted by tariffs? Sure! I only write this to remind everyone that the same 15,000 companies, CEOs, boards, teams, and organizations remain. They didn’t just disappear. They’re working this very moment to figure out how best to navigate the economic climate. They’re holding strategy meetings, calling political contacts, reevaluating contracts and cost structure. All to drive returns for you, the investor in the company. The only sane investment strategy is to harness the collective efforts of this group for your benefit. As the kids would say, let them cook.
Be a Prudent Investor
One final thought that I alluded to earlier. Because of the algorithm and how we consume the news today, we’re more susceptible than ever to getting riled up about the political environment. We need to be aware of this and guard against allowing our personal politics to influence our investing. I’m not telling you to unsubscribe from your favorite podcast. Or never watch Laura Ingraham on Fox or Rachel Maddow on MSNBC. And I’ll absolutely not tell you who to vote for.
But I will leave you with this. If you’re riled up about the country, the world, the white house, or anything else you get from your personal news, please try turning it off and going for a walk. Outside, not on a treadmill. It doesn’t need to be sunny or warm. Just go outside and walk it out for a bit. I guarantee you’ll feel better and am pretty sure you’ll make better decisions.