The Politics of Investing
At Goodman Financial, our Investment Committee begins each meeting with a discussion of the current political environment. The conversations are not driven by any person’s political leaning, but rather, the impact a policy or law could have upon an investment holding or strategy. On the surface, this may seem rather straightforward. However, like politics itself, clarity can be elusive. We recognize this and evaluate the scope, likelihood, and timeframe of a political action.
Scope It’s important to distinguish between narrow and broad political implications when making investment decisions. The recent “Epi-Pen” pricing outrage illustrates this. While the manufacturer’s executives were grilled by the House Committee on Oversight and Government Reform, the broader message was concern about drug pricing. The narrow outcome was a meaningful decline in the stock price of Mylan N.V. (the maker of Epi-Pen). Broadly speaking, and despite considerable distress, there has been no material, new legislation passed to mitigate unjustified drug pricing.
Likelihood Where politicians could invoke change that focusses on an issue, the question then becomes how likely is it that they will do something. Here a continuum of possibilities needs to be deliberated. A sample range could be from no action, to “kick the can down the road,” substantial reform, or entirely new laws and regulations. Next, an expected probability of each occurrence should be formed i.e. low, moderate, or high. In real-world terms, examples are numerous, but two that resonate with many are taxes and healthcare. These areas are already complex and when formal or informal proposals for change are introduced, the certainty of any outcome is unclear. While taxes and healthcare tend to be sensitive matters for investors, it is important to resist the temptation to base investment decisions on emotional or political preferences. Monitoring the progress of proposals is a preferred approach and component of making informed investment decisions.
Timeframe In politics, time and speed are not highly correlated. Given this, what is the timeframe for implementation of investment decisions? The answer is – it depends. Investors can be rewarded when they are adept at anticipating a change will be enacted along with an effective date. The effective date aspect is a nuance overlooked by many as some political actions take effect immediately vs. retroactive or prospective start dates. In addition, it’s important to know if there are applicable phase-in periods or an expiration date for a proposal.
The foregoing is a synopsis of the political implications impacting investment decisions. Clearly investors who omit attention to politics subject their portfolio to undue risk.