Everyone has a tantalizing soundbite these days. Media companies, bloggers, tweeters and the average person all blurt out the dramatic to garner attention. Although it’s hard not to be pulled in, it is best not to take them at face value. Instead, take a step back, and apply some logic. Here are a few to consider.
“Trump is going to be impeached and the market will crash.”
We don’t blame anyone for thinking about this especially when the President says to Fox News: “I’ll tell you what, if I ever got impeached, I think the market would crash.”
That is interesting and attention-getting hyperbole. However, is there any merit behind this statement?
The economy is growing nicely, unemployment is at record lows and profit margins are at record highs.
Additionally, there are few data points to make a meaningful conclusion about what will happen if the president is impeached. Only two presidents have been impeached—and only one in modern history.
Clinton was impeached in December 1998 and the world did not end. A year after Clinton’s impeachment the stock market increased 20%.
Nixon resigned in the face of being impeached in September 1974. Over the next year the stock market increased more than 30%.
Even if President Trump is impeached, it is unlikely to alter people’s desire to purchase soda from Coca-Cola, candy from Nestle, food from Kraft, or gas from Exxon.
“I’m concerned about inflation–I’m going to cash.”
Inflation is running about 3%. If you hold cash over the next 20 years, you will lose about 45% of your purchasing power. Even if you invest in a 10-Year US Treasury yielding 2.8%, you are still losing purchasing power. That is a really bad value proposition.
The only time cash makes sense for a long-term investor is if we experience long-term deflation. Given current economic strength, deflation is a very low probability.
Cash provides liquidity and makes sense to satisfy short-term needs in which you cannot experience pricing volatility. Cash is not a productive long-term asset.
“The dollar is devaluing—I’m putting my money in cash.”
The devaluation argument is similar to inflation—they both result in diminished purchasing power.
Since 1913, the US Dollar has lost approximately 97% of its purchasing power. Yet the dollar still has value in the global economy. We assume the Federal Reserve will continue to print more currency resulting in further devaluation.
People will often cite this factoid so they can promote gold as a hedge against paper currency. Admittedly, over long-time frames, gold has typically done better than paper currency.
However, gold has done much worse than stocks and other productive assets.
We would much rather own a multi-national company like Nestle that sells food, drink, and candy into 200 countries every day. Investing in multi-national companies allows an investor to be diversified away from any single currency or government, not to mention offering long-term appreciation potential.
“I don’t want to own (X, Y or Z company)—they promote liberal causes. I don’t want to own (A, B or C company), they are dishonest and greedy.”
The average company in the S&P 500 employs tens of thousands of people. It is illogical to think they all hold the same political mindset or moral compass. To say a company is “good” or “bad”, “conservative” or “liberal”, is a tremendous oversimplification. Making decisions based upon these types of assessments will deliver incorrect results and deny yourself of good investment opportunities.
Even if the executives of these companies are very vocal about their political views, that does not imply those views are backed by the Board of Directors and subsequently the company at large.
People have always been emotional creatures. This will not change. The 24/7 news cycle we live in has supercharged our emotional responses.
However, successful investing continues to be predicated upon logic, discipline and facts. Turn off the sound-bite of the moment. Sit in a quiet room and independently think about your goals and thoroughly research the facts. Doing so has a far higher chance of delivering a good outcome than fast, emotion-driven reactions.