Being Aware of Political Bias with Investing

Investing and political bias

It should not come as a surprise to anyone that investors allow their political biases to influence their investing views and decisions. We need to understand what biases we have.

People struggle enough with trying to figure out what they should be doing with their stock portfolios to want to make this task even more difficult. The closer our understanding is to what actually goes on, the better our investments will do, and investors already harbor beliefs that will direct them away from reality without adding the coloration of political bias to the mix.

It is not easy at all to get around any of these limiting beliefs, as they are well ingrained in the psyche of investors. Ideas like stock prices are alleged to move in step with near-term business results or the market itself is thought to be led by the hand by macroeconomic forces are pernicious.

This all comes down to beliefs, the beliefs investors may have about how things work versus the beliefs that the market holds which are the real driver of changes in stock prices, where one’s success will depend on how well we align our own beliefs with the beliefs of the market, where anything that leads us away from what actually happens will result in underperformance.

We try to impose objectivity on a process that is based upon objective data to an extent but is fundamentally subjective, where this subjectivity interprets all data and all influences and becomes expressed in a process of ongoing valuation that we call price.

We bring this up quite often because this really is the foundation for understanding the way stocks move, where we need to refrain from looking to superimpose any beliefs upon the market, charting a course for it that it may or may not take and may indeed deviate from our projected course considerably.

A good example of this error in practice would be with investors continuing to assume that their preferred means of valuing stocks sees the performance of high performing stocks as excessive and even dangerous, where there are no such ceilings or not even any good reason to believe that they exist.

If we instead understand that these stronger trends upward are in their most simple terms continued expressions of more positive beliefs about the stock, we are then and only then prepared to set aside any belief we may have apart from this and start paying attention to what really matters, how these beliefs of the market manifest and how we may want to act based upon these data.

There may indeed come a time where we need to be wary of a reversal, but we should not just wish to conjure one up because this will have us acting presumptuously at best. What usually happens is that the market ignores our bearish assumptions and just keeps going up.

We need to instead base our decisions not on presupposition but on evidence, and when the sun stops shining, we will know it, because we can just look up at the sky. Everyone knew that Bitcoin’s initial explosion could not last forever, but trying to pick a top on the way up has you wrong at every point other than the actual one, and you won’t guess this very often but will pay a price every time you’re wrong, and you’ll be wrong a whole lot more than you are right.

If we really had the ability to use objective means to predict these things effectively, to be right more often than wrong in other words, which could be shown to generate an advantage in practice and not just be attempted to be justified by circular theories, then we’d really have something of real value and not just a means to create disadvantages.

We don’t have such a thing though and the very idea that we could involves misunderstanding, because stock prices are simply not mechanistically determined at all. The market assigns various weighting to circumstances, and the reason why it reacts differently to objective stimulus of a given quantity at different times is because we mistakenly try to isolate this information and assume that it is the complete relevant data set instead of perceiving that there are other variables in the equation that cannot be ignored and produce differing results.

We Need to Recognize When Our Beliefs Fail

We would think that it should be enough to see these ideas about the objectivity of stock prices fail so miserably, and if we are even pretending to do science here, we should know what the failure of our hypotheses mean, but when we base our assumptions on dogma instead, dogma isn’t bothered by being disproven, as people just cling to it regardless of the evidence.

It is important to understand this process if we are going to understand how political bias can get in the way of our investment decision making, because political biases or any bias take us further away from the proper understanding of how prices move, serving to further blind us to reality.

We can compare two current potential influencers on stock prices, one political and one economic, to show how these arise out of a similar mechanism and produce a similar error.

Those who believe that stock prices should be lower than they are given our current economic crisis have placed these beliefs alongside the market’s and have come out horribly wrong. Those who saw lower levels as more appropriate and were willing to forego the rally that happened since saw this belief deprived them once again by misdirecting them from the only thing that matters, the sum of all factors that the market acted upon which added in considerably more bullishness than these people expected.

The same thing can happen if we let our political beliefs weigh in on these things, where the error here isn’t to account for political factors based upon perception but to misinterpret the facts due to bias, facts determined by the market, not any particular person’s belief.

The risk here is when we are on the wrong side of a move and allow these biases to encourage us to do the wrong thing. With the election coming up, some are concerned that a Biden administration and especially the prospect of his party controlling both the House and the Senate as well may send stocks tumbling.

It certainly might, and we are concerned about such a thing as well, but we realize that the market doesn’t just check into our views for guidance, or jump the gun and act before it is ready. and our view isn’t even claiming that this will happen but instead that it may happen, even likely happen, but this is not in itself actionable.

This is where investors go so wrong with political biases and any other bias, especially including the objectivity bias that we were just speaking about. Those whose own political beliefs align more with the Democrats may be seeing the green light now but are more likely to drive through red lights if they come. Those who side with Republicans may miss how green the light is now and will continue to do so until such a time that their predictions come true, if they do.

Scientists have studied this and the results demonstrate that political bias does color people’s view of the stock market, where we are more likely to see markets as bullish when politicians we agree with ideologically are in power, and see things as more bearish when their opponents hold the reins.

False Beliefs Don’t Harm Us Unless We Act on Them

The beliefs themselves aren’t harmful as long as they do not lead to action, but even buy and hold investors allow their beliefs about political influence on stocks to weigh in, beliefs that downplay such things. Downplay here means to not place the amount of emphasis on something that it merits, but pretending that the effects of these things are minimal does serve to make people more comfortable staying the course, legitimately or not.

Just like looking at macroeconomic data and thinking that’s the whole story as far as stocks are concerned, thinking that political influences are the whole story commits the same mistake, taking part of the picture and alleging that it represents the whole picture or enough of it to make it decisive.

People go back in time and come up with data such as stocks doing better in the inaugural year of a new Democratic president, when viewed over a period of many decades, as if this was any sort of convincing evidence that we’ll see the same thing happen with Joe Biden. Even within this one thing, the circumstances can differ a lot, in addition to all the other circumstances that weigh in on these things that may differ.

We do not need a crystal ball to decide what to do with our stocks, we don’t need to know where things may be headed beyond the horizon, because that horizon will come in due time. We should not even care what we believe, as we want to instead focus on what the market believes, and the only way to know that is to see how new horizons change their beliefs.

It can be helpful to form beliefs about future reality, like wondering what will happen in the extremely likely event that Joe Biden becomes elected president in November, and how the market will react to it and his putting his platform into action, but these are predictions of what may be yet to come, and the path between then and now still needs to be accounted for.

This is what we miss when we try to predict the future, what happens between now and then, if the then part ever comes that is. As much as we may be bothered and even frightened by Joe Biden, the market hasn’t been too afraid of him thus far, and we do not get to decide this, they do.

We need to lose much more than our political biases to be in a good situation to make our investment decisions, we need to stop perceiving our beliefs as actionable when they are clearly not. When the time for action actually arrives, it won’t be our beliefs about reality that produces it, it will be the reality itself changing before our eyes, on its own.

It is perfectly fine to prepare for the future by trying to assess the current known probabilities of certain events, but these are merely hypotheses that must always be confirmed before we can become confident enough on them to act.

The real risk is when the time comes and our losing our way has us acting not upon the facts but upon these beliefs that are not manifesting. If the market ends up loving Biden, or just doesn’t care and continues its upward climb unfazed, and you held the opposing view, you may be more prone to be too bearish.

If you support Biden and see the market tremble in his presence, causing people to head to the exits like they did when the pandemic first hit, your mistaken bullishness that your political beliefs can get you in a lot of trouble.

These are the risks that people speak of when they point out the effects of political bias upon investing, and while these have to go, we might as well rid ourselves of all of our biases while we are at it and gain the better understanding of markets that we profess to seek.

We’ll find out how this all unfolds soon enough, just by watching, but we cannot let our political bias or any other belief of ours to steer our course, no more than we would want to steer our car based upon where we think the road will turn rather than letting the road ahead guide us. Keep your eyes on the road if you want to stay on it.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: [email protected]

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