Leaving Your Politics Out of the Investing Process

Paul Winkler: Okay. I’m ready to have fun. You guys ready to have fun? Yeah.

Nick’s like, “Yeah.” Louis, I can’t see.

Big Beautiful Bill Workshop

I have had a fun week collecting stuff and some stories to tell this week. So, yeah. We’ll do that as we go on.

A lot of stuff has happened this week. Oh my gosh. So many different things that I want to cover with you all.

We’ve got a workshop coming up on tax stuff. I probably won’t talk a lot about the tax stuff, the Big Beautiful Bill, this week so much, because we’ve got a big workshop coming up on Thursday, and you can check that out on the website, paulwinkler.com.

Evan and I are going to be doing that. And we’re still trying to put stuff together, because it is so wild to me that somebody could get a bill passed through and still not have a clue how some of the provisions work.

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I mean, some of the stuff is just not nailed down, and we have to wait. It’s kind of like we have to pass the bill before we know what’s in it. 

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But it’s not even that. I’m joking about that. That’s not even it. It’s the stuff that’s not in the bill. Some details are just not in there, and to know how to deal with it — I mean, it’s just literally we’re going to have to wait around a little bit.

But that’s always the case with these things. I can’t tell you how many times there have been things that are just not nailed down, we don’t know what’s going to happen, and we have to just kind of wait. And people put out their opinions regardless of what they know is really in the bill or what’s really meant by some of the language in there.

But there are some really interesting little provisions. We’ll talk about some of that stuff that is nailed down, that we do know. And Evan Barnard and myself, we’re going to be doing that this Thursday.

The Benefit of Diversification

But one of the things that I have on many occasions, and this year has been one of those years where you don’t really have to talk people down from the ledge much, right? In April, yeah, Chris Hand was on there, and we went back and forth on text messages a little bit. And happy birthday, Chris.

So, yeah. One of the things that he and I went back and forth on was this whole idea of Trump. Remember back in April, I guess it was, I think it was in April, he made the comment, “You need to buy. Right now, instead of being scared of the stock market, you need to buy.”

And he came out with that pronouncement, and a lot of people are going, “Okay, what’s he got up his sleeve? What’s going on?” And I look at it and go, “We never sold.”

And the thing is that the area of the market that most American investors focus almost myopically on is large U.S. companies, and that was the reason he had to say that, is because that area of the market had just done so badly. But there were other areas of market that actually had done quite well, and if you had bought back at that point in time, it probably wasn’t the greatest idea simply because those areas had already been doing well even before, and they hadn’t gone through the crash, right?

So that’s the benefit of diversification. We have things that move in different fashions — they don’t go together, they don’t move in lockstep. They don’t. Large U.S. companies went down, but we had some international companies actually going up in value because the dollar was weakening, right?

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So when things move in lockstep and you’ve got everything moving in lockstep, you’ve got a problem. You’ve got a diversification problem. 

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That’s something I talked about, is a lot of people went through that in the very first quarter. They lost money and they shouldn’t have.

Reducing the Risk in Your Portfolio

So one of the things that he was talking about, Chris was talking about, is how, “Hey. Man, the market went down and you didn’t buy, and did you buy?”

And I laughed and I said, “No. Actually, with the portfolio, and you may not know it was happening, we were actually rebalancing the portfolio at that point in time.” And that’s a critical method of management of money that helps to reduce the risk of the portfolio, and it actually takes advantage of these movements in the market that can be pretty rapid, and you don’t know when they’re going to happen.

But in essence, at the end of the quarter, now we’re doing this daily in the U.S., we’re doing it daily in international markets, but here’s what happens is let’s say you have big companies, U.S. companies, drop in value significantly. And that’s one area the market went down way more than anything else did, and that’s really what did happen.

Let’s say that you had, let’s say, 15% of your money there, and then you had 15% of your money in some other area that had done well during that period of time. Well, the knee-jerk reaction because of the way investments are sold is to get rid of that U.S. stuff because it’s dogging it.

You’ve heard a lot of people talking about, “International’s where it’s at. We’ve got to increase it.”

And, “Oh, you ought to be focused on small caps. You ought to be doing value. Oh, the rotation has occurred.”

That’s the terminology that was used. “Rotation has occurred.” In other words, “Large-cap growth stocks are out and value stocks are in,” or, “Large-cap growth U.S. stocks are out and international’s in.”

I look at it, and people ask me, “What do you think, Paul?” And I’m going, “You don’t know.”

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Any kind of a bet as to what’s going to happen next is nothing but that: just a bet.

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So what ends up happening is you look at that and you say, “Okay, so, yeah. Value stocks are overrepresented in the portfolio now because they’ve done well in the first quarter. International stocks are overrepresented now because they did way better and large U.S. companies did nothing.”

Well, Trump comes out and makes the pronouncement, “You need to be buying right now,” and it wasn’t following his guidance by any stretch of the imagination. It was just going, “Yeah, you know what? Large U.S. stocks are underrepresented.”

And when you rebalance in that way, the main reason you’re doing it is not so you can buy at a bargain. That’s not the reason you’re doing it. The reason you’re doing it is because it helps reduce the risk of the portfolio significantly, the standard deviation, and it helps what’s called the Sharpe ratio of the portfolio, and that’s risk-adjusted returns that we’re dealing with. So that was something that happened in the first quarter, and you look at it and go, “Well, it turns out, yeah, it ended up being a really good thing.”

Investing Based on the Party in Charge

But here’s the other thing that people do: They look at who is in office. And it has been pretty easy to keep people disciplined, especially this year. Why?

Because a lot of the people that listen to this station are very conservative, right? And they like the idea that a Republican is in office. Now, some people that listen to the station are the other direction. It’s a minority, I would think.

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But in general, out there, you have a lot of people that don’t want to invest when the opposite party to them is in power. 

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And this is something I have to fight literally every four years or so, and sometimes I have to fight it because people are looking at the polls as when we’re looking at going into the election, they’re worried that their party is going to lose or that they’re going to lose a majority of seats in Congress or whatever. And sometimes, it’s because they’re afraid that their president or their presidential choice is going to lose.

So what they do is this: If you’re a Democrat and a Republican’s going to win or likely to win, you go, “That’s it. I’m out.” Some people leave the country, some people just go, “I’m just out. I can’t bear this idea of investing because I’m afraid of what this person’s going to do when they get into office,” right?

And then you’ll get on the opposite side of things. You get somebody that is a Republican and they’re afraid of Democrats.

So I have done a workshop for years where I go, “Hey, look. Markets tend to go up under either party, and the reason being is that companies are run by people that are going to do whatever they’ve got to do to make sure that earnings go back up.”

Well, lo and behold, that was one of the topics of conversation on the financial channel this week on CNBC. And here’s what they were talking about right here. Check this out.

Carl Quintanilla: Jim, one of your big themes this year has been trying to get people to divorce their politics from their view of the market.

Jim Cramer: It’s very hard. I deal with a lot of people who are very hard left, and they’ve sat out this rally, because they think, to some degree, the rally is based on the end of democracy as we see it.

PW: And right there, there are a lot of people that he deals with that are hard left, and they made a decision about investing that was just based on their emotional desire to stay away from this president, and they were worried that democracy was ending. Well, where was that being talked about? There were a lot of media sources that were talking about that.

And you hear this stuff and you go, “Gosh, this sounds terrible. I’ve got to get out.”

You look around and say, “Well, you shouldn’t be just in one market in one country,” would be one thing I would say. That’d be something I would say.

But also, you don’t necessarily look at it and say, “Hey, I think the stock market’s going to go down and all of a sudden these companies aren’t going to have to pay to use your money anymore.” It’s irrational.

Mixing Politics With Investing

PW: Here’s what he went on to say.

JC: And then I just talked to other people who you would regard as MAGA, and they’re making a lot of money. And what I’m trying to say is it doesn’t matter.

No one knows that you bought. Well, we’ve got them, don’t we? That you bought Palantir or Supermicro or Dollar General or Dollar Tree. No one knows.

PW: Isn’t that funny? How often people, and I’ve talked about this before, they worry about which stocks they own. They want to feel like they’re making a difference, for example.

And that can go for, like, ESG was a big deal, you know? Environmental, social, governance stocks, and people who wanted to help companies who they believed had the same values that they did.

And I would point out, “Hey, you know what? They’re not benefiting from your money anyway because you’re just buying it off of somebody else that’s selling it.”

So don’t buy or sell stocks based on that criteria, because the reality of it is, and he just said it, they don’t know what you own because your money’s not going to them. It’s going to somebody else that already owns the stock. It’s not like an IPO where the company is getting the money from you directly.

JC: That you bought that because you support Trump. No. You bought that because there’s a huge infusion of capital.

And I highlight Block today. I mean, Block gets out of the S&P. The amount of money that it’s indexed is insane. This is the money coming out from Hess.

So I want to remind people there’s nothing political about making money, and I think that people feel that it is. Somehow, it’s a referendum on Trump. He doesn’t know that you made money, right?

PW: Yeah. It’s like shooting yourself in the foot, right? Cutting off your nose to spite your face is kind of the idea that comes to mind right there. So that is politics being mixed with investing.

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It tends to be very counterproductive for people that let their politics drive their investing. 

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And it’s on both sides of the aisle. We’ve seen studies, and I’ve talked about studies before, where cash flows from Republicans increase into the stock market when a Republican is in power, and cash flows from Democrats tend to increase when Democrats are in power, and they tend to benefit on both sides. Markets go up under both parties.

Listening to the Narratives About the Market

CQ: In April, we were talking about Black Fridays. We were talking about S&P 4K, and that was based on policy. So, can you blame people for thinking that’s a hot stove?

PW: So right there, and Carl, bless his heart, I watch these guys in the morning, and he’ll always take the opposing view, almost always. “Oh, well, can you blame them? Everything was falling apart.”

And the emotion. You can hear the emotion in his voice.

“Can you blame them? Everything was going to heck in a hand basket, and it was looking all bad.” And the reality of it was that you’re listening to the narrative out there and you’re responding to it in what you think is a rational way.

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That’s the thing about stock thinking and market timing, especially market timing: It feels like the right thing to do. 

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It feels like the right thing to do because I’m doing something for self-preservation. And that feels rational, it feels prudent, but we don’t think of it as market timing when we’re engaging in that, do we? I mean, you wouldn’t ever hear somebody doing that, calling it what it is.

JC: Well, we talked about Bessent and whether Bessent was in favor of or against, and how it mattered, about Powell. The initial tariffs took people by surprise because a lot of that was Peter Navarro, and Peter’s very hard-line, and then Peter becomes less of a factor, and new people come in.

CQ: People screw up.

JC: And maybe it’s a little bit more reasonable.

CQ: Nobody listens to him anymore.

JC: So what happens is that you can’t pay attention to the first guy who speaks. You have to pay attention to the next guy and the next guy.

PW: By the time you sit there and listen to everybody that has an opinion on what the stock market’s going to do, the market’s going to do something totally different, which is kind of funny that he’s saying that. But I just go, “Wait, wait, wait, wait. You don’t listen to the first person, you listen to the second person that actually contradicts the first person. Then you listen to the third person that contradicts both of them, and then you listen to the fourth person.”

And it’d be “Calgon, take me away,” at that point. And that is the insanity of this method of managing money. It just cracks me up.

The Variables Driving the Market

JC: And I just think that people are missing out because they just think that the President is creating a huge budget deficit. They’re not thinking about what it means to have industries doing incredibly well right now in the aerospace industry.

CQ: Yeah. What if they’re moving in investing?

JC: Report’s going to be ramping up. They’re not thinking about the IPO market coming back.

They’re not thinking about a huge number of new pipelines that are being built in this country, not thinking about how the stress tests change what banks are able to do. These are all things that he’s done, the president, and I just think you can sit there and say it’s wrong, or you can make money.

CQ: I think that’s a good laundry list.

JC: And I think that people don’t want to make money because they don’t think it’s real or right.

PW: I think it is a good laundry list. Now, he’s saying that maybe they are taking a moral stance on it. “I’m not investing because I think it’s morally wrong to benefit under a Democrat or a Republican or a political party that I don’t believe in,” and I think there was a point there.

But I like the laundry list that it gives there, because this is one of the reasons I tell people it is so stinking hard to figure out where markets are going to go. There are so many variables.

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There are way too many variables that drive the returns of stocks and where stocks end up going.

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But what really, really matters, you’ve heard me say this a million times, what really matters when it comes to investing is that you own companies that are run by people that are going to do whatever they’ve got to do to get a company back to profitability, no matter who is in office. And that’s where he ends, and I want you to hear his take on it.

CQ: I mean, the strains that people argue he’s putting on the judicial system, on the legal system, on the education system, posting AI videos of arresting President Obama, is that ever market-pertinent?

PW: Oh, what a question.

JC: No.

PW: No?

CQ: It really isn’t?

JC: No.

CQ: The market can be that agnostic?

JC: Yes. And that’s part of what I said at the annual meeting, which is that you have to divorce the market because what the market responds to is profits and to money, and the profits could be extraordinary, and the money in it could be extraordinary. And a lot of that is because of MAGA policies.

And you say MAGA. I just said MAGA, and there’s probably 50% of our audience who said, “He’s one of them.”

CQ: We’re a divided country.

JC: I’m owned by the viewer.

How Companies Get Earnings To Increase

PW: Yeah. So here’s the deal is you listen to that and you say, “Well, if you have somebody in there,” and you’ve heard me say this. And if you haven’t heard me say this, this is the point.

If let’s say you have somebody in there that’s really good for the company, for the bottom line of the company, because companies sell more things or they open up new markets to them or do whatever, and earnings go up as a result of increased sales, that’s one way to get earnings to go up. The other way to get earnings to go up is for companies to reduce expenses significantly.

And there are a lot of ways to do that. You can do that through reducing regulations. You can do that through paying off debt. You can do that through opening up new streams of money or capital to those companies.

You can do that through layoffs. You can do it through reducing expenses as far as energy expenses or those types of things.

You can do that as a result of, let’s say that you have a certain expense in the form of taxes, and all of a sudden now you’ve given the company tax breaks because now they can actually deduct capital expenditures, and they can deduct it all at once versus having it go over multiple years, and that comes down into higher earnings. All of these things can create earnings, and there are so many things I’ve just named that you just go, “How can you possibly keep track of all of this stuff?”

And you say, “Well, Paul, why are you talking about this?”

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The vast majority of investment management out there, still to this day, is actively trying to out-return the markets.

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It’s through movements of stocks, through movements between markets. The study that I talked about a few times is that even index funds that are designed to track a market index are being traded more actively than individual stocks.

That tells you that the reason I’m talking about this is valid because this is how people do things, and you have to watch turnover ratios in your mutual funds, you have to watch changes in your mutual funds between different areas of the market, how the investment managers are changing things, and recognize that the vast majority of money is being managed by professional managers, and they’re engaging in these processes. They are part of the statistics and the data that I am talking about. Beware: This is the way that money is typically managed.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.