Paul Winkler: Welcome. This is “The Investor Coaching Show.”
Arlene Brown: It’s been an exciting week.
PW: It has been an exciting week. One of the big topics this week, of course, has been the election, no doubt.
AB: I know. I have a headache about that.
PW: You have a headache about it? Well, I think a lot of people were upset about it, and they felt like there should have been a bigger red wave. Quite frankly, if there had been, then I think a lot of the things that would happen over the next couple years could have been blamed on conservatives.
PW: So, now that they don’t have that, I think it’s actually probably decent. That’s my personal thinking about the whole thing regarding that. But I think that there are a lot of other things going on that we could talk about, Arlene.
I think, as far as how things turned out, if you looked at how people voted, it was interesting that somebody had actually given me this article. It was called “How We Voted in the 2022 Midterm Elections.”
The first thing that hit me was the Hispanic and Black voters continue to vote solidly for Democrats. However, there’s been a shift in the Republicans’ favor since 2018. Younger Black voters moved a substantial 22 percentage points toward Republicans in 2022.
Think about the future.
That is an interesting difference. I think people get so set in their ways. Thinking back to previous generations, they don’t ever change until the new guard comes along, then all of a sudden things change.
I think that’s an interesting change there. I think it’s a change toward being more conservative in that particular respect. Who knows? I don’t want to read too much into anything, but I think that one of the things I had been thinking about is how people voted with their pocket books all year long.
It’s one of the things that went through my mind. There is conservative, liberal and Republican, Democrat. What happened in the stock markets over the past year and a half has been decidedly very different than it was under Trump.
Year-to-Date Return Data
PW: Okay? I thought we should look for voting records of people that work for companies. That’s what we found. We actually looked up the data on the voting records of the employees of Netflix, Invidia, Adobe, IBM, Microsoft, Apple, PayPal, Cisco, Amazon, Facebook, Intel, Broadcom and Oracle, and Texas Instruments.
What I thought was interesting is I pulled up the year-to-date return data, because we had just been talking about Disney, and of course there’s that issue. Disney has been pummeled, and they blame it on their streaming. I think there’s more to it.
AB: There’s more to that.
PW: Yes. Yes, Arlene, I believe there’s more to it than that. Are people going more that direction or are we reading too much in an election?
The average rate of return, if you look at various areas of the market so far, year-to-date are now actually up for the year.
Could we be reading too much into election results?
AB: Which is very interesting, because most of the pundits on CNBC were saying a year ago, “No, why are you looking at small value?”
PW: Yeah. They’d say, “It’s just a loser. Why are you messing with it?”
AB: This morning they are saying, “Forget about such and such, just shift your attention from growth.”
PW: Oh, thank you very much, CNBC. I really appreciate your help here.
It’s like saying, “Oh, the horse is out of the barn. Quickly, go close the door.” Isn’t that always the way it is?
A negative 31% year-to-date return is the average for the companies I previously mentioned. Overwhelmingly, you have a more democratic-leaning populace working for the companies. So, I don’t want to read too much into it, but I think that’s a pretty big shift.
AB: If you look at the demographics of those companies, people are younger.
PW: Yes, I think a lot of people talk about the social dilemma.
AB: Yes. They are more into social issues.
PW: Yeah. So, I think that’s happening. I think what’s happening in general as I see it is that people are starting to get a little bit sick of all the infighting. That’s another thing that I want to talk about, is that those are some of the headlines in the news today regarding the election.
Market Predictions and Politics
Number one, I did a workshop a while back, and I’m just going to hit a few of the points that I had in this workshop, because I updated some of the data on this, and it was about elections and markets in general.
I said, “We have candidates, and we have fear and anxiety. This is the same thing all over again two years later.” I talked about changing your lenses in that workshop and I said, “Have we been here before?”
Number one is Republican versus Democrat. I said the predictions were all over the place as to what was going to happen in the stock market back when the presidential election took place.
People were talking about a Biden boom, and they were talking about a boom if Trump won. Now we had predictions again all over the place, but it was just saying one thing that I found that was really definitive in what they said would happen.
For your investing purposes, it doesn’t matter who wins.
As they said, the stock market will enter its best performing environment if Republicans take control of Congress in the midterm elections. But then I saw a lot of articles saying, “Hey, it doesn’t matter who wins.”
AB: It doesn’t matter who wins.
PW: And I agree with that. I agree with that, Arlene.
AB: And looking at the data from 1926 to now.
PW: Yeah. Yeah, you look at it and it literally doesn’t matter who’s in, you’ll have gains. But we always fear the unknown, and worry starts with a trigger.
In this case, the trigger was the election. We have the “what if” questions that come afterward. Questions like: “What if taxes change? What if we have martial law? What if we have gas prices skyrocketing more because we’re running the strategic reserve down? What about fair elections? Is that something that’s going to be something that’s bygone?”
The worry leads to anxiety, which by definition is a fear of the future, and then it leads to demoralization. We get exhausted, and then we see that bad things can happen, and then what we do is we’re tempted to take action.
One of the things that I find is that uncertainty is that worry fuels. If we’re intolerant of uncertainty, we won’t be resilient.
We all go through adversity, but it’s bouncing back and going to a higher level when you come back. The reason being is because you learn something through whatever you’ve gone through.
AB: It creates strength.
Going through upturns and downturns gives you strength as an investor.
PW: Yeah. When we go through bad stuff, it takes a little time for some people to learn, but we learn and we fix things, as I’ve often said. But what happens when we’re intolerant of uncertainty, and there’s always going to be uncertainty, is that we worry a lot.
Let’s say someone is taking a trip to Europe and buys a one-way ticket. They have no money, no plans, and no return date. They think it is going to be great.
Then take another person who is intolerant of uncertainty. They’re going to take a trip to Europe. They’ll have a round trip ticket, cash, cards, itinerary, and contingency plans all set. They will be ready. That is the type of person who is intolerant of uncertainty, and that is also the type of person who typically invests in fixed income investments.
Why do people lose against inflation? Why do investors not consistently reap the benefits of great market returns? Well, it’s because people try to figure out when the market’s going to go, when it’s going to go up, when it’s going to go down.
They try to figure out which stocks are better than others. Since 1926, a dollar has grown like $12,000. But if you look at small companies, it’s grown to around $40,000 or something like that, and if you look at small value, it’s over $100,000.
The rate of growth has been that extreme. It’s a pretty big deal to capture market returns and stay in the market.
PW: Yeah, and making sure you don’t go in and jump out. I mean, think about all the bad stuff that’s happened over the last century with world wars and elections that have gone bad, with crisis regarding currencies, crisis regarding oil, and with all of the different types of battles that we’ve gotten into with interest rates.
We think our Fed interest rate right now is high. It was 20% in 1980. I mean, it’s nothing right now compared to what it has been and what we’ve seen in the past.
Elections and Fear
People that are intolerant of uncertainty would be those people that would invest in fixed income investments and wouldn’t be able to deal with markets.What we do with the stock market is we put up with a lot of stuff.
We put up with the ups and downs and the uncertainty. Historically, we’ve been well rewarded for it.
The question is, what lens are we wearing? We’ve got three different outcomes. We’ve got a positive outcome, a neutral outcome, and a negative outcome.
We often fear that with elections, the worst case scenario is going to happen, that we’re going to get higher taxes, that the country’s going the wrong direction, we’re going to alter our constitutional rights, and that we’re going to crash in the stock market.
Don’t let your fears control your investing.
What we do is we let our imaginations run, we think more government means inevitable socialism and communism. That’s what we thought was going to happen with a Biden win. The reality of it was that large U.S. stocks are only up 8% from the time of his election.
Now, if you look at large U.S. stocks, yeah, it wasn’t what people would’ve liked to have seen for that one asset category, but that’s why we diversify. That’s why we don’t put everything in that basket.
The question was, have we been here before?
AB: We adapt. It’s really interesting what you said about either red, blue or neutral, and it really shows from 1926 to 2022 that it doesn’t matter whether it’s a mix, you know?
PW: Oh, yeah.
AB: Or Republican controlled or otherwise.
PW: Yeah, it really didn’t matter. My job isn’t to talk about politics, but it’s already on everyone’s minds. It really is. I talk about markets and investing, but you look at from when social security was passed 1935 for the next 10 years, virtually every asset category was up significantly from that point in time.
Some asset categories were up fourfold, like microcap stocks were, and small value wasn’t far behind that. Medicare in the 1960s was another one that people weren’t too sure of, but markets again adapted.
Markets Are Made to Withstand Change
Truth be told, markets really significantly went up over the years. We’ve talked about that, already went through the period in time of the 1920s till now. But you look at that period from the 1960s until now, and you have some things that are up.
So, talking about the effects of the election. One thing is that the market understands socialist policies might slow growth. It’s not a secret.
You have something called velocity of money, which is essentially this: money has the function of being used many times in our economy. When you put money into a bank, they hold a reserved requirement and then lend some of the money back out to flow through the economy.
It goes back in the bank, it gets sent back out, then it goes back in typically seven to eight times. I don’t want to get into too much on that because it’s pretty complicated.
But the idea is that when you have anything that is slowing that down, like taxation, sometimes the reserve requirement changes. There are all kinds of things that can change that velocity.
It can slow down the motion of money, therefore slow down that multiplier, thereby slowing down the economy is the short version of it.
Recognize that markets are built to handle this stuff.
It gets incorporated into the prices of securities before anything takes effect. Now, market prices directly correlate to risk, not growth.
If you look at from 1900 to 2002, it shows that countries with growth rates above average yielded returns below the average of 16 countries. What we did is we actually looked at that data and we looked at economic freedom versus the stock market return. It was very, very different.
If you look at developed countries like France, Germany, Australia, and the United States, they had slightly increased returns when economic freedom increased, but emerging markets actually had decreased returns.
So, it was a mixed bag, and it’s a very short period of time, so you can’t really draw a conclusion. Anytime you’re doing statistics, you don’t look at short periods of time for conclusions.
But if you look at countries like Canada, France, Japan, the UK, and the U.S., all of them had higher levels of social assistance. If you look at all the different types of welfare benefits for various countries around the world, the U.S. had the lowest.
Diversify, Diversify, Diversify
I took the data from January of 1993 through November of 2022. I looked at the return of the markets of these various countries through that period of time. I found that they’re very similar.
The only not so great out of all of them was Japan. Canada was good, the United Kingdom was good, Europe was good, and the Pacific. All arguably much more socialistic than the United States, but they all had decent returns over that period of time.
That was from 1993. If you look at the previous 1970 through 1989, you’ll see that all of those countries that were more socialistic had higher returns. Almost every one of them did better than the U.S.
So, again, you look at that and go, “Well, they were both good,” and it didn’t really matter, but it was interesting to look at where the higher returns were. Here’s the lesson on that. Because you have these long periods of time where one area will do better than another, but over the long run, they all have done really pretty well. This is a screaming reason that we want to make sure that we’re diversified as investors.
Over the long haul, markets do well. It’s as simple as that.
In any case, the only time we ever really had a bad run was during Herbert Hoover, and that was during the depression, right? I’ve talked about this before. So, there’s really no making any kind of rhyme or reason out of that.
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