Let me ask you an honest question.
Do you invest based on cold hard numbers?
Or…do you invest based on gut instinct?
Well, strictly speaking, it can be hard to draw a line between logic and emotion. Often, they will tend to blur together. Distorting perceptions. Like a funhouse mirror.
This is especially true when it comes to political ideology.
Source: Image generated by OpenAI’s DALL-E
Let me give you two real-world examples of this:
- In 2017, Donald Trump took control of the White House. When this happened, some investors believed that Trump’s slogan of ‘drill, baby, drill’ would create a strong boost for American oil and gas companies. So, these investors placed their bets accordingly. But perhaps their enthusiasm was misplaced. Incredibly enough, traditional energy underperformed during the Trump presidency, while renewable energy outperformed. This seemed to defy the prevailing wisdom at the time.
- Later on, in 2020, Joe Biden took control of the White House. When this happened, some investors believed that Biden’s promise of a ‘green revolution’ would create positive momentum for solar and wind companies. So, these investors poured their money into this sector. But — yep, you guessed it — they made the wrong move. Renewable energy underperformed during the Biden presidency, while traditional energy outperformed. Well, good grief. For these investors, it must have felt as if the carpet had been pulled out from under them.
- According to Bank of America analyst Savita Subramanian, the divergence in performance was quite sharp. During the Trump presidency, traditional energy was down 29%, even as renewable energy was up by 306%. Then, during the Biden presidency, traditional energy was up by 139%, even as renewable energy was down by 55%.
Now, in both cases, the investors who tried to time the market according to political ideology ended up being burned. So, why on earth did this happen?
- Well, you see, emotional bias can be a tricky thing. It can distort our perceptions. Warp our reality. Cause us to see patterns that may not actually be there.
- Yes, the American president is constantly in the news. Yes, his words and actions are closely scrutinised. But is he really as important as the media has made him out to be?
- Let’s face it. As human beings, we are psychologically wired to care about ‘who’. But this means that we often forget about ‘what’.
So, here’s my controversial opinion. There’s actually another institution out there that’s much more powerful than the American president. And that institution is the market:
- It’s wild. It’s rowdy. It’s a force of nature. Indeed, I consider it to be an animal with a primal will of its own. Therefore, it will always strive to find its own centre of gravity.
- Yes, you might be tempted to chase a hot trend based on political ideology. But perhaps it’s better to focus on intrinsic value instead. In other words, you might be better off investing with your head instead of your heart.
- Therefore, as we look ahead at the US presidential election, here’s one area of the market you need to carefully consider. Here’s a hint: it involves silicon wafers, which Republicans and Democrats alike are incredibly concerned about…
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