Our presidential political season is now in full swing, and what an odd run we are about to have. It is often said that our political choice is a choice between the lesser of two evils; this year that seems especially the case as the two mainstream party candidates are polling as the least popular ever. Both candidates have been accused of being loose with the truth. I think New York Times columnist David Brooks said it best when he said that we seem to be living in a post-fact era.
He has a point. One would think that in the information age it would be harder for politicians to get away with fudging the truth. After all, we live in the era of instant fact-checkers. However, that is not the case, and I for one blame postmodernism. For those who are not familiar, postmodernism is the idea that truth is in the eye of the beholder. You have your truth and I have mine. This is contrary to the modern view which led the Western world out of the dark ages and up to the 1960s. Modernism believed truth existed on its own, independent of what you or I or anyone else thought. In a postmodern world if I believe the world is flat and the sun revolves around it, then that is my truth, facts be damned.
Worse than ignoring facts, this post-modern mindset is more likely to abuse them. It is a fact, after all, that the sun rises in the east and sets in the west. So I’m right, the sun obviously revolves around the earth. Except that it doesn’t. Facts taken out of context can be just as misleading as blatant falsehoods.
One great example of this is when people talk about what the stock market has done under one party versus the other. It doesn’t matter what party the president hails from; what matters is what policies actually come out of Washington. It didn’t matter that Kennedy was a Democrat and that Reagan was a Republican; what mattered is that both lowered taxes and the economy grew. It didn’t matter that Roosevelt was a Democrat and Nixon a Republican; both tried price controls and they both failed. (Price controls always fail, but that is a topic for another day.) It doesn’t matter that W. Bush was a Republican and Obama a Democrat; both never saw a regulation they didn’t love, and both saw inequality increase dramatically.
Taking facts out of context is not limited to politics. The investment world is increasingly being driven by facts taken out of context. My favorite recently has been the drumbeat of, “We are at record highs.” This is factual, however: it ignores that we have basically been at the same point for almost two years now. It also ignores that the valuation spread between the most expensive stocks and the cheapest is the largest it has been since the tech bubble of the late ‘90’s, and finally it ignores the rest of the world.
To search for truth, one cannot just look at random facts. One has to take facts in context and have a rational theory as to how these facts all relate. Milton Friedman, the late Nobel Prize-winning economist, used to say that we must reject theories without facts and we must reject facts without theory. Sometimes the stock market goes up or down during a President’s tenure based on nothing but coincidence.
If we want to know the truth about the market, then we just can’t look at the headline U.S. indices. We have to see the context. Most stocks in the U.S. have not done well over the last year, and stocks globally are even worse. Things have not been as good as “record highs” suggest.
Of course every cloud has a silver lining. This also means that those who are now talking about how expensive the market is and how overheated it may be are most likely wrong. At Iron Capital we do not see a market downturn in the immediate future. Much more likely in our view would be a reversion to the mean, which would say that stocks that are expensive need to be cheaper while cheap stocks rebound. The S&P 500 may be expensive with a price-to-earnings ratio near $20, but our core portfolio has a price to earnings ratio of $11.50. Cheap stocks are there to be had and that bodes well for investors going forward, regardless of which party is in the White House, or record highs, or any other random fact taken out of context. And that’s the truth.
Chuck Osborne, CFA