The current election is a good reminder of why investors need to overlook political issues when considering their portfolio actions.
Political decisions can significantly impact companies and sectors, but investors can spend too much time focusing on politicians' words instead of actions. This can be disastrous.
Politics and investing
There is a large amount of research that shows investors who rely on their emotions too much when making investment decisions end up losing money or making bad calls. The same can be true when it comes to making investment decisions based on political ideals.
This is something the Oracle of Omaha knows only too well. Since he started his investment career in the 1940s, Warren Buffett (Trades, Portfolio) has seen a string of different presidents and political environments.
His experience on the subject suggests it is worth reviewing his comments about politics and investing in understanding more about how the two don't mix.
In a 2017 interview with CNBC's "Squawk Box," Buffett said he has watched politics for "all my life." And during his adult life, half the time he has had "a president other than the one I voted for."
But despite this, he went on to add that he's never sold stocks based on who's occupying the White House. "If you mix your politics with your investment decisions, you're making a big mistake," Buffett said.
Other comments from the guru also suggest that he'd rather keep business and politics separate altogether.
At Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) 2019 annual shareholder meeting, Buffett declared:
"Berkshire Hathaway certainly, in 54 years, has never — and will never — made a contribution to a presidential candidate. I don't think we've made a contribution to any political candidate."
He went on to add:
"We've had one or two managers over the years, for example, that would do some fundraising where they were fundraising from people who were suppliers of them or something of the sort. And if I ever find out about it, that ends promptly. My position at Berkshire is not to be used to further my own political beliefs. But my own political beliefs can be expressed as a person, not as a representative of Berkshire when a campaign is important."
Undesirable outcomes
Mixing business and politics can lead to undesirable outcomes. Much of what goes on in the political arena is based on hearsay and speculation. Very little of this actually has an impact on the real world. That implies that trying to invest based on some political outcome is akin to gambling. It involves a large degree of guesswork and projections. Even then, there's no guarantee the trade will be successful.
Furthermore, as Buffett has also mentioned, the U.S. is not a dictatorship. While politicians may look to introduce legislation against companies, these companies can fight back. If they go to court, the outcome is usually well measured and balanced. The political and legal systems generally work to achieve the best result for all stakeholders. That may, on occasion, lead to a poor outcome for some parties. Still, anything that improves the country's overall prosperity will lead to an improved outcome for all businesses and citizens.
As such, giving too much weight to political outcomes in an investment decision can be incorrect.
Political decisions can impact the prosperity of companies. Still, as Buffett explained in 2017, despite all of the wrong political choices made in his lifetime, the country has continued to prosper and good business have produced positive returns for investors. Good companies with competitive advantages and devoted customer bases should be able to continue to grow no matter who is in control.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- What We Can Learn From Warren Buffett's Purchase of Blue Chip Stamps
- 5 Things to Watch in Berkshire Hathaway's 3rd-Quarter Results​
- Warren Buffett: I Knew Enough to Lend Money, but Not to Buy the Stock
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