Political ideology and investing

[erac22]

"Oh...I also agree with the above that political leanings would not affect those general principles. However, political leanings may affect your decision to move in or out of the market for substantial portions of your portfolio. eg, I dont think a Democratic victory in '08 if full priced into the market yet, but will be around the time of the early primaries. I will be out of the market in a big way at that point, or, more accurately start taking hedged short positions unless something big happens between now and then to reduce the likelihood of a Democratic sweep."

The political outlook may affect how you invest (although I recently saw an article saying that the Street is starting to shift more democratic based on where political donations from employees at the big banks are going, which would seem counterintuitive) but I'm still don't see how there would be a correlation between one's political ideology and HOW he invests. I think it's more based on personality, risk appetites, and desired involment in one's portfolio. If you're claiming that a particular political ideology implies a greater risk appetite or more desire to actively trade, please share your reasoning.

[ALawPoker]

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perhaps 15% of fund managers beat the market, and they are rarely ever the same funds from year to year.

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This is such an important thing to understand.

If more people knew this and took 5 seconds to ponder the ramifications of it, I think you'd see a lot of mutual fund managers out of work.

EDIT: Please take the effort to realize this does NOT imply there could be a >50% chance you can pick one of the "winning" mutual funds if you make good selections. It implies that there is a ~15% chance you will be better off with a mutual fund. Or in other words, a ~100% chance you made the wrong decision.

[Copernicus]

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Oops, ya I did. But I was basically just saying that, ya, the "efficient market theory" is something I'm aware of. (I got the impression you were suggesting I'd never heard of it or something... but I maybe misread you.)

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No, I was just giving the cliff notes to your realizations (aside from the political connection).

[The once and future king]

The thing is equity/commodity et al markets are irrational, not rational.

This means that at certain points they will have either to much fear or to much confidence. The idea is to buy when there is to much fear and sell when there is to much confidence. Easier said then done of course, but doable non the less.

This is not something you can do in the short term.

[Poofler]

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Welcome to the effiecient market theory and its effects. With the exception of the above noted complex strategies, eg. covered calls, other derivatives, hedge funds etc. it is difficult to beat the indices, especially after the transaction costs of an actively traded portfolio.

Large, sophisticated investors, such as pension funds, are beginning to move away from traditional equity investments and replace them with "portable alpha" funds, basically funds of hedge funds. They have been successful at beating the indices during the bull market, but I wonder how well they have fared the last few weeks. Portable alpha managers claim to reduce volatility, but increase the mean return..ie raising but shortening a bar graph of probable returns. In the relatively stable markets up until now, Ive generally seen return improvements of 2-3% per year in up periods, and 1/2 to 1% less losses in down periods. The question is how do they fare during the roller coaster ride.

Oh...I also agree with the above that political leanings would not affect those general principles. However, political leanings may affect your decision to move in or out of the market for substantial portions of your portfolio. eg, I dont think a Democratic victory in '08 if full priced into the market yet, but will be around the time of the early primaries. I will be out of the market in a big way at that point, or, more accurately start taking hedged short positions unless something big happens between now and then to reduce the likelihood of a Democratic sweep.

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I worked for one of those funds of funds. We dealt nearly exclusively with the top 1% of performers, globally - who were consistently very very good after joining the matrix, down or up market. I don't remember the numbers off-hand, but the roller coaster scenario was a concern and I seem to recall the funds still easily beating traditional index investments in those situations as well. Of course, smaller sample size. And all of this is moot for the typical investor anyway, who doesn't have 25 million lying around.

I'm not a terribly strong believer in the efficient market hypothesis. Everyone's running the same fundamentals, but I certainly believe there are traditional manager minds out there who understand the psychology of it better than the vast majority of investors - and the real cream of the crop can fairly consistently beat the market with a concentrated approach - beyond the added costs of more volatility. And, they are not found managing mutual funds.

[Copernicus]

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The thing is equity/commodity et al markets are irrational, not rational.

This means that at certain points they will have either to much fear or to much confidence. The idea is to buy when there is to much fear and sell when there is to much confidence. Easier said then done of course, but doable non the less.

This is not something you can do in the short term.

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Its not something the "experts" have been able to do consistently for the long term either. Market timing strategies don't raise returns net of expenses. Simple dollar cost averaging into index funds (or their historical construct before they actually existed) beats 95% of the market timers for every 5,10, 15 and 20 year period since the depression, and none of the 5% appear in more than 2 consecutive such periods. Obviously the more recent results are more credible, since the data is much more robust, and there may be some bias from the strong bull markets,but you would expect a legitimate strategy to show at least a few consistent succeses.

Short term plays obviously can work, but they are too infrequent and require moves that are too big for large scale investors. Eg when the Dow was close to 14000 I closed out all my long positions since numbers like that are often ceilings that the Dow bounces off of. (More psychology than anything as OAFK noted.) I got back in a little too soon apparently but I did get back in close to the floor and its just been bouncing around since then.

A large fund cant make moves like that and my plans for early 08.

[The once and future king]

You are only talking about one market. Some investors have shown great consistency at calling the top of one market selling up and getting in at the bottom of another market rinse and repeat.

[adios]

Honestly I think you're barking up the wrong tree asserting the correlation with people who try to beat the market and their strong support of interventionalist government.

[ALawPoker]

ROOF! ROOF!!! That's right, TREE!!! It's on now.

Hmm. Do you really mean I'm "barking up the wrong tree," or are you saying my assertion is wrong? There's a big difference.

If you really mean barking up the wrong tree, then.. OK? My bad? If you mean you disagree with me, then feel free to let me know what you disagree with and I'll be happy to defend myself.

It doesn't make sense to you that people who think hands on public policies are most productive will also tend to think hands on investment approaches are most productive? And vice versa? Why do you disagree?

Do you just assume you disagree, because the analogy scares you, since index funds can strongly be argued to be objectively more efficient?

[The once and future king]

You are being naive.

There is so much much more to investing than just the Equity market and its indexes.

Some very very successful investors move funds across markets exploiting the irrationality of markets. Markets go through trends were they phase from being to confident to too fearfull. Exploiting this is called contrarian investing. You buy when everyone else is afraid (assets are cheap) and sell when everyone else is to confident (assets are expensive) this is the investing philosophy of Warren Buffet:

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Warren Edward Buffett (b. August 30, 1930, Omaha, Nebraska), often called the "Sage of Omaha" or the "Oracle of Omaha"[3], is an American investor, businessperson and philanthropist.

Buffett has amassed an enormous fortune from astute investments managed through the holding company Berkshire Hathaway, of which he is the largest shareholder and CEO. With an estimated current net worth of around US$52 billion,[2] he was ranked by Forbes as the third-richest person in the world as of April 2007, behind Bill Gates and Mexican businessman Carlos Slim Helú.[4]

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WB hasnt just beaten the market(S) he has crushed it.

I also find it interesting that you would believe a market to be rational and efficient but do not consider the pricing mechanism of that market to be rational and effecient e.g. fiat currency. That is not a logical position.