Understanding public policy decisions is crucial to investment success.
This has never been more true. Government intervention is changing the nature of every business. As an investor, you need to figure out what is going to happen, and whether it affects the companies in which you own stock.
Over the last several days we have emphasized how easy it is to make mistakes in the minefield of politics.
- You can misunderstand the difference between politically controlled agencies and the civil service. We will explain how to tell the difference.
- You can confuse your role as citizen with your desire to make money as an investor.
- You can ignore good sources of information, just because you disagree with their politics.
We have some more mistakes to highlight in this series, but there is a positive side. We strongly encourage readers wanting to follow this approach to review the links above.
We are going to show how to figure out where to get information, and how to use it. Part of our success in client portfolios relates to a disciplined approach to public policy analysis:
It sounds simple, but hardly anyone can resist the temptation to confuse opinion with analysis. Most of the current pundits are offering opinions about politics at the very time that stimulus dollars are starting to hit. This is good for their ratings, but bad for your portfolio.
They jumped the gun months ago picking "Obama stocks" on his inauguration. The earnings effects have yet to show. Meanwhile, companies have gotten lean and mean. Many are showing reasonable earnings even in a time of economic distress. Let us find these winning stocks.
As background, here is a recent article we wrote for TheStreet.com's RealMoney site. It is a bit introspective, but regular readers of "A Dash" may find it useful.
From RealMoney.com, 4/30/2009
When I started writing for RealMoney, I had an idea: I wanted to study how the nexus of politics, public policy and specific stocks could provide a big edge to readers. Almost two years ago, I launched a Web site, ElectionStocks.com, and hired some staff support. Since I watch political news and the markets for most of the day, I feed ideas to the team; I also write some pieces and review the work.
The Best Advice?Sometimes the best advice is a warning against any particular action. We had no precedent for an election and transition in the middle of an economic crisis. Many analysts and researchers were going on TV with their "Obama stocks" at the time of the election, at the start of the year and on the day of the Inauguration -- the election cycle offered three chances for publicity.
The cold reality? This time was really different. Even when the election results were certain, no one could know which of the Obama proposals would survive in the Senate, nor how quickly they would be passed. More important, a single issue dominated all others: dealing with the "toxic" assets. The new administration did not seem to understand that this was the keystone for all problems. The first approach to the problem of price discovery was Treasury Secretary Tim Geithner's maiden voyage ... and a stock market disaster.
The biggest Obama mistake has been the failure to deal with this problem; no one on the team appreciated the significance. The result? We are getting the announcement about the particulars of the Public-Private Investment Program on May 15, more than six months after the election; Hank Paulson went to Congress in September. This will go down in history as one of the worst responses to a financial crisis, partly caused by the transition in administrations.
Simply put, this was not a time to buy stocks because of the winning candidate's positions. Those who did so had big losses, because the general economic questions overwhelmed any specific stock ideas.
I've been watching elections for 40 years and studying how the election cycle affects stocks for more than 20 years -- I taught political science and public policy for 13 years before entering the investment business in 1987. I also devoted particular focus to this cycle -- I'm confident that I'm among the most qualified analysts on the subject -- and still I refrained from pushing the investment ideas our team developed.
It was not right, and I knew it.
How to Make MoneyPart of investment success is avoiding losses. I hope that readers of my commentary on Obama policies have shared my caution. When the stimulus package was passed, we identified some stocks that would benefit. As is often the case, the problem was the time lag. While the market attempts to look ahead, there are very few experts on government spending. It is very complicated. I follow everything said about Obama and stocks and filter the prospects through almost 40 years of training and experience. Here is my general conclusion:
Now Is the TimeIt may seem silly to some, but now -- 100 days into the administration -- is the correct time to start thinking about Obama stocks. Here's my reasoning:
What to BuyOver the next few weeks I plan to highlight several different groups of stocks, each of which may benefit from Obama policies. I will downplay those where I think congressional prospects are poor and emphasize those where prospects are good.
Meanwhile, my team has constructed a stimulus package portfolio. We have carefully monitored opinions from a wide range of experts featured on financial media. (RealMoney's own James Altucher's ideas are prominent in the portfolio.) The portfolio has had a positive result, but the results are nothing special so far. That's good -- most people bought the Obama stocks too early, got discouraged, and bailed out. This relative loneliness in the space provides a good opportunity.
Here is a preview of our coming articles:
- Health care: Information technology stocks will definitely do well. Other health stocks depend upon the yet-unknown details of the plans. Look at Athenahealth (ATHN)
- Alternative energy: We like First Solar (FSLR) , and it is part of the portfolio. A number of other good choices (courtesy of James A.) are also included.
- Infrastructure: There are several choices in this space -- check out KBR (KBR) .
- Defense stocks: This is a surprise to many who see Obama as cutting defense, but cutting the costs for Iraq may not translate into lower returns for specific contractors. We see good prospects for many defense holdings. Jim Cramer also is noting this strength on earnings calls.
It is hard to believe. I would not have predicted it in advance. The best time to buy the Obama stocks is after the first 100 days. Stay tuned for more specific picks and how you can use Obama's policies as you craft your portfolio.