Knowing Your Bias

““It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.” —George Lorimer

Each of us has an emotional and a logical side- in investments the emotional side can present biases in our thinking. As we get into the thick of things in terms of elections and leadership, I hear more and more political biases crop up with clients, investors and friends. No matter what side of the aisle they sit, they believe “my” person needs to win for the market to go up, or if “my” person loses it will go down. However the stats all illustrate there is no correlation between that political bias and reality. Let me show you:

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Transcript

Hi there. Mike Brady with Generosity Wealth Management; a comprehensive financial services firm in Boulder Colorado. Today though I’m recording this video from as I call it Generosity Wealth North, which is in Dubois Wyoming. This is where I like to spend a lot of time over the summer.  It allows me the opportunity to get away from the hustle and bustle, focus on the business, what are my values, what are my beliefs, what are my core tenants of the business, of who I am as a person, how I interact with clients, all of these various things.  And right behind me is the view from the south, so this is actually out of our bedroom, which is our cabin is right behind the camera.  You’re going to see this is a ranch, a guest ranch and there’s a, well you probably can’t see it but there’s a little pond over there and our good friends the Prines have been there for five generations.  We’ve had this cabin here for, my wife has had it for 45 years; her father got it in the early ‘70s, so almost 50 years.

Let’s get down to business. It’s my belief that we have a logical side and an emotional side in our lives and the way that we approach decisions and so, the problem is when one gets out of whack.  So, if we’re all emotion then we’re going to be – I think we all know somebody like that who makes every decision on emotions and they’re just going through life in that regard.  We know some other people who are all logic.  We’ve got to have a combination of the two and I’m going to expand upon this in a future video; I’m not going to really talk too much about it today.  But, it’s important for us to know what our biases are.  That’s the emotional side of our investing.  I would actually say that the logical side, the mathematics is pretty good from an investing point of view.  Not good, it’s the easy part.  The hard part is our emotions.  We’re human beings.

What I’m hearing right now is a lot of political bias from various clients.  And I’ve been doing this for 28 years.  As a matter of fact, I got my licenses in August of 1991 so this is exactly my 28^thyear of meeting with clients.  And what I hear from people on both sides of the aisle, whether Democrats, Republicans, et cetera, is your rooting for your guy, which is fine or your party, you know, your political view, but you’re extrapolating that into what the market is going to do. So, if your guy wins or gal, your person wins, then the market is going to go up or the other person wins then the market is going to go way down.  And I’m here to say that historically speaking that has not been the case.  I don’t know the future any more than you do so when I look at some percentages I think it’s important for us to acknowledge that it could be different in the future.  All we’re saying is what has happened historically.

Up on the screen what I’m putting up there is the election cycle years going back 82 years.  Historically speaking the worst has been the year after the election and at 52 percent of those years have been positive going back to 1933 all the way up to 2015. And if we were to include 2017 that was actually a positive year.  That was the year after the most recent election, but this is the graph that I have.  When we go into the pre-election year, which is that second bar graph over the third one over, is 90 percent of the years, I like it, this year have been positive, with an average return of 16 percent, which is pretty remarkable, pretty remarkable when you think about it.  The election year, which would be something like next year, 2016, 2012, 2008, et cetera, 70 percent of them have been positive and, of course, 30 percent negative with an average return of about 4.9 percent.

Let’s go over to the next graph that I’ve got on there. What you’ll see is pre-election years, like we are having right now, the worst going back 82 years has been a few percent loss.
Election years like next year we’re going to see, that’s the next graph on there, the vast majority of them, 70 percent of them have been positive, you can see some have been negative, usually single digits, except for 2008; that was the financial crisis.  I would argue that that had very little to do with the political, it just happen to be in an election year cycle.  It could have happened in 2007 or 2009, it just happened to happen in 2008. So, the fact that it was an election year or any kind of a stamp on the current president at that point I just don’t believe.  I think that the logic, the data is there to say that it was going to happen one way or the other no matter who the president was.

Post-election years is the next graph that I have up there.  You’re going to see the majority of them are positive, 52 percent of them.  Which when we really look at all of the years together I mean it kind of makes sense that most of the years are positive because you’ve heard me on previous videos that say that three out of four years historically have been positive and so we ought to have that mindset, assuming that we believe in the markets, we believe in the United States and in the world and that this is the best place for our money, why else would you have money in the markets if you didn’t think it was going to go up long-term.

So, I think that it’s important to remember that you can see that from a correlation point of view, whether or not let’s go back to the post-election year whether or not it was a democrat or a republican you can sit here and cherry pick whether or not you think that your guy or gal was the reason for that or your particular party.
It’s just not it.

One thing that I hear as well is a lot of people saying well in the last two/three years have been incredible for the stock market, which it has. Hey, listen, it’s been a real good run.  I have to say that there were people in 2016 that said if Trump was to win the market is just going to plunge. Well you know what, the exact opposite happened; 2017 was a very non-volatile year and very positive for the markets.  2018 more volatility.  2019 so far this year, very little volatility historically speaking and a very nice positive year.  So, we’ve had two of the years so far positive, one year not so good.  But here is a graph that I’m putting up on the screen, which will show the top graphic is how many months after the election for Obama. The bottom one is how many months after the election for President Trump.  Listen, I don’t want to take away from anything that President Trump has done, but I’m just saying that we have to keep these things in perspective that Obama, from a market point of view, really had a tough time at the beginning of 2009.  I would argue not his problem not his fault, that was a continuation of the bad 2008, but then it really kind of rallied through ’09, ’10, ’11, ’12.  I mean remember were you there paying attention?  I know I was.  Nobody wanted to invest in equities.  I mean everyone was so negative so negative that was the time to be positive and those that invested in ’09 heavy were the ones who were the big winners.

For Trump over the last couple of years you can see those years it’s been positive. Great. I want to say that that has proven that those people who said it was going to be negative because of him and a volatile person, individual, et cetera, no that’s not true. You can say maybe it was because it was a continuation of Obama.  Okay.  Whatever.  But the fact is that it is positive but it hasn’t been as great as all of those who give all the credit to Trump or those who say no it should have gone negative it actually went positive.  What you’re seeing here is a lot of not duplicity, a lot of hey, this is what is going to happen, lack of humility and the opposite happened many, many times, or there’s no correlation.  If you’re looking for a pattern, our brains have a tendency to do that, you’ll find a pattern. I’m saying I don’t believe that there’s a pattern and this is how I view the world.

Mike Brady; Generosity Wealth Management; (303) 747-6455. Give me a call anytime or an email. Frankly, you won’t know if I’m there in Boulder or I’m up here in Dubois because I am all electronic up here with no problems.  I’m going to end it with a little pan of the rest of the valley. You have a great day.