Iron Capital Insights

  • Iron Capital Insights
  • November 3, 2010
  • Chuck Osborne

Change Is Coming to Washington. So, does that make it safer to go into stocks?

Depending on your political views you are happy, sad, or indifferent about last night’s election results. Regardless of political orientation, most people probably believe that the election will be good for the stock market. After all, the stereotype is that Republicans are pro-business and Democrats are not.

Certainly this administration and this past Congress have been anti-business to an extreme. Even MSNBC.com said this election was a “repudiation of the vast expansion of government.” However, I would caution against getting too excited about what is happening in Washington with regard to your investment portfolio.

Last night I did what I do with every election: sat on my sofa and flipped channels. This particular evening I watched the enthusiasm and pure joy on Fox News, and the wailing and gnashing of teeth on MSNBC. As is the norm, I saw the more measured responses of the three networks as well as the microcosm version of the same themes in local coverage. My wife told me the same story she always tells me, about how she took a college journalism class from Rodger Mudd, who suggested this is how one should always view the news – by comparing each outlet’s views. I responded as I do every two years, with the story of my father calling my mother to the television during the 1980 presidential election coverage to tell her that he thought Rodger Mudd was about to start crying.

Then I turned to CNBC and found the most personally entertaining of all the coverage. They had charts showing the possible effects the various election outcomes might have on the markets – if the Republicans control the House and the Democrats control the Senate and the Presidency, then the market does X; if the Republicans take both the Senate and the House, then the market does Y; if the Republicans control the House but only by this much, then that will happen; and if they control the House but don’t have a representative from Maine, then…or was it one of the Dakotas? I started to get very confused.

This morning we have already seen predictions ranging from the market being up 16% to the market being up 20% over the next six months. Lost in all of this noise about elections and politics is a simple truth of investing:  a company that is still in operation is worth the present value of future cash flows. In other words, a company is worth whatever someone is willing to pay for its future earnings. Only two things really matter, what those future earnings are and what price you paid for them. That is it.

Everything else the talking heads fill our ears with – politics, price charts, economic indicators, even who ends up winning the Super Bowl – is at best secondary and at worst complete garbage. In the very long term, a company domiciled in a country governed by free market principles which places a high value on private property rights will tend to earn more than the very same company would in a country where the government over-regulates and nationalizes privately owned companies or gives them to a union and/or an Italian competitor based on political whims.

To the degree that a Republican House can stop these more extreme measures more effectively than moderate Democrats were able, our economy will improve and that will benefit corporate earnings and thereby the stock market. However, some of the best investment opportunities in the world have been in China, and they are still communist.

The market will be up, most likely substantially, several months from now, but it is not because of who just won the election. It is because, for the third quarter in a row, nearly 80% of S&P 500 companies have produced better-than-expected earnings, and the price for which we are currently able to buy those earnings is very reasonable. For those who were waiting for the election to get back in the market, you have lost out. Prices are still pretty good, but they were much better at the end of June. One of the keys to successful long-term investing is to recognize the difference between noise and information, and having the discipline to ignore the noise and act on the information.

This election has serious political ramifications, and is truly historic in that regard. Of course, the San Francisco Giants just won the World Series and that was historic too. If I could only find that chart about what the market does when the Giants win the Series right before Republicans take over the House…

Chuck Osborne, CFA
Managing Director

P. S. On a personal note, my apologies that it has been a while since we last sent out an “Insight.” That is mostly because there has been very little to report since we last told you to ignore August because the market was going to go up after Labor Day. It is also because we have a new addition to the Iron Capital family that has meant some sleepless nights for yours truly:  Mary Frost Osborne arrived September 27, 2010. Everyone is happy and healthy and getting into the new routine.