Happy New Year.
2016 was certainly a memorable year, if for nothing else than the series of large-scale unexpected events that transpired. Britain’s decision to leave the European Union, Donald Trump’s victory in the presidential race, and the Cubs winning the World Series caught many by surprise (granted, Chicago entered the baseball season as 4 to 1 favorites, but then again, they are the Cubs). We were struck with a few investment-related observations:
First, beware foregone conclusions. Conventional wisdom assigned only a remote possibility to “Brexit” prior to the EU referendum. Many mainstream pundits and news organizations gave Hillary Clinton anywhere from an 85% to 99% chance of winning the White House. One bookmaker in Ireland deemed Mrs. Clinton’s prospective win as such an inevitability that it actually paid out $1 million early to customers who had bet on her (oops). These examples highlight the risk of an overreliance on forecasting. When it comes to accurately predicting geo-political outcomes (much less trying to profit from them), “nobody knows anything.”
There is yet a more basic reason to avoid rearranging a portfolio around perceived short-term catalysts. Assuming prior knowledge of Brexit and the presidential upset, was the right investment play even apparent? Price action prior to the actual vote-tallying suggested that the markets were strongly averse to the prospects of Britain leaving and Trump winning. Indeed, within a couple days of Brexit, international stocks had given up about 10%; US stock futures plunged on election night when it appeared that Donald Trump had taken key battleground states. Yet in both cases, the losses were quickly reversed. Even if future events are known with absolute certainty, the market’s response to them is unknowable.
December 7 marked the 75th anniversary of perhaps the most significant unexpected event in US history – the attack on Pearl Harbor. To paraphrase value investor Daniel O’Keefe with Artisan Partners, if you had told people on December 5, 1941 that in two days Pearl Harbor would be bombed resulting in a world war with 60 million people dying, would they buy or sell? Most would sell, but in reality, the market kept surging through the war. “You can’t predict how the macro economy will affect the market. But you can have insight on businesses, valuation, management teams and business quality.” We strongly agree. Buying good companies at attractive prices and holding them for the long-term is our preferred strategy, no matter who is in the White House or who wins the World Series.
Wishing you a happy and eventful 2017,
Aaron Pettersen, CFA, CFP®