Since my last newsletter, markets continue to be, well, tumultuous. The ups and downs could be enough to give any investor whiplash.
How have you reacted over these last few weeks? Have you sold riskier positions? Opened new ones? Added to battered ones? Or simply held on tight and gone along for the ride?
In general, we believe taking the headlines with a grain of salt to be good advice. But this week I want to acknowledge the ways in which the federal government and private companies are inextricably intertwined, and give you a window into how our team’s thinking is shifting in the face of changing government policies.
News headlines tend to focus on consumer-facing concerns, but it’s critical for us as investors to recognize the substantial impact federal policy can have on private companies.
It’s understandable that individuals can feel disconnected from the concerns of “faceless corporations,” but the health of these companies has ripple effects throughout the economy, impacting everything from job markets to overall GDP to how much retirees have in their IRA accounts.
On the flipside, people can also be hostile toward the federal government. Many Americans believe government spending is out of control and, judging by our deficit, they have a reasonable case.
But changes to federal funding can also have consequences for large corporations and small businesses alike, which then has ripple effects throughout the economy.
In short, while it can be easy to harbor a certain cynicism toward big business and big government, we should remember that these institutions are made up of countless individuals whose output, earnings, and purchasing power impact the collective economic wellbeing.
As investors, it’s important to set aside our feelings about how business and government ought to work and focus on how individual stocks could be impacted by concrete policy decisions coming out of Washington.
For the benefit of our investors—and my own portfolios—I keep my political preferences firmly separated from my investment strategy. That said, government policies do have real consequences for businesses, markets, the economy, and thus our portfolios. Almost every publicly traded company can be impacted by federal, state, and local policy, and it would be naive and even risky to ignore these factors.
With rapidly shifting policy decisions from Washington and news updates coming at us 24/7, we cannot afford to stand still. The future is uncertain, but anxiety is not our friend. Instead, we need to be more vigilant, more agile, and more decisive as we analyze the impacts policy decisions may have on our investments.
In our analysis, we like to plot out “multiple possible futures” for each company we’re considering. In how many scenarios does the company thrive? In which scenarios does the company suffer? We don’t invest based on one thing we think will happen, but on the many things that could happen.
Volatile markets are never comfortable. But as we like to say, they are the price of admission for stock investors. Volatility is the cost of greater potential future returns, and we believe a volatile marketplace usually presents big, long-term opportunities. The trick is to remain level-headed enough to spot them. That’s what our team is striving to do right now, and I hope you’ll endeavor to do the same.