Investing for Survival

 Investing for Survival from Barry Ritholtz

 “It’s going to blow up the deficit, won’t create any jobs and will cause all sorts of other problems.”

A hedge-fund manager was lecturing me about the Jobs and Growth Tax Relief Reconciliation Act of 2003, better known as the Bush tax cuts. I had been suggesting that this fund close its short positions on technology stocks, and move to a more constructive equity posture. I was getting nowhere.

The fund manager, active in New York Democratic politics, couldn't see past the policy issues involved. As long as George W. Bush was the U.S. president, this manager’s bias was against long positions. But as an astute market observer noted at the time, “Give me a trillion dollars, and I'll throw you one hell of a party."

How did missing that party work out for him? From the pre-Iraq war lows, U.S. markets rallied 96 percent during the next four years. Chalk up another bad investment decision to political bias, emotional involvement and lack of objectivity.

Before Republicans chuckle too hard, the exact same conversations played out six years later. In March 2009, I kept hearing how the newly elected, Kenyan-born, Marxist President Barack Obama was going to be bad for investors. Some 10,000 Dow points ago -- literally, the very day of the lows -- Michael Boskin, chairman of the Council of Economic Advisors under President George H. W. Bush, penned a Wall Street Journal op-ed titled, "Obama’s Radicalism Is Killing the Dow."

That was 160 percent ago.

This is a favorite theme of mine. The Bush and Obama examples above come from a presentation I have been giving for years now titled, “This is Your Brain on Stocks.” It is an exploration of the various ways your brain operates to undercut your investing prowess. You don't need a Ph.D. in psychology to figure out that allowing your personal-belief systems, biases and emotions into your investing process is a recipe for underperformance and losses.

I was reminded of these two episodes in the response to a couple of recent Bloomberg View columns. The pushback on "Lessons from the Gold Crash" was fairly astonishing. Zero admission of trading error, and lots of, “you’ll see-just wait” comments. The bias prevented any sort of investor introspection.

It was more acute on our recent climate-change discussion -- "Global Warming Battle Is Over Market Share, Not Science." The point of that column wasn't about anthropogenic global warming, but about the investment consequences and opportunities. Change was going to lead to potentially enormous opportunities in industries as varied as insurance, travel and hospitality, energy exploration, mining, shipping and transportation, and agriculture. This was lost on the many e-mailers and commenters, many of whom seemed more interested in lecturing me on sunspot activity than in having their portfolios make money.

Hey, someone has to be on the wrong side of the trade. Biased, emotional, politically driven traders are the likeliest contenders.

But it's more than just the gold bugs and the global-warming denialists who risk their long-term portfolio gains. Consider the following political positions and their investing analogs:

• Fed haters: They believed that the central bank's zero-interest rate policy and quantitative easing would be useless, have little impact on the economy and/or equity markets.

• Anti-military, pro-pacifist: Don’t care for military spending? Companies such as Alliant Techsystems, Raytheon, Lockheed-Martin, Boeing and Northrop Grumman have all done well despite sequestration. If you ignored these because of your pacifist bias, you missed out on quite the run in defense and aerospace.

• Hate bailed-out banks? It is easy to be angry at the bailouts, fines and lack of prosecution from the financial crisis. If you chose to not look at these names, you missed huge bounces in American International Group, Citigroup and Wells Fargo. (I plead guilty of this, at least until last year, when we added a financial-sector exchange-traded fund and Bank of America to our client holdings).

• Inflationistas: Perhaps one day, U.S. Treasuries will be a fabulous short trade. But during the past five years, dogmatic claims of imminent hyperinflation led nowhere except to huge losses.

• Obamacare: Regardless of your views on the Affordable Care Act, the health-care industry has done well the past five years -- even better since the Supreme Court decision. And in a related sector, the biotech industry has been on fire.

• Genetically modified foods: You may not care for GMOs, but Monsanto has been busy perfecting traditional hybrid breeding without any genetic tinkering. They also bought the Climate Corp., to better capture and resell climate data to farmers.

All of the above examples are situations where the subconscious is doing its damage. Whether its biases or emotions, investors need to be aware of the ways your wetware weighs on your portfolio. (None of these apply to willful decisions like socially conscious investing, or applying Sharia law, or any other decision made with full knowledge of the options).

Once you become aware of how your biases affect your portfolios, you have a choice: You can recognize the impact it has on your thought process and make adjustments, or you can ignore it, and suffer the consequences.

Ideology remains an awfully expensive indulgence. If you feel compelled to waste vast amounts of money, consider instead collectible cars, vintage watches and vacation properties. Your heirs will thank you.