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Chuck Jaffe: Wall St. Legend Says Investors Should Ignore Politics
One can separate political views (and contributions) from investment practices. Over the past several years, what has served as a benchmark for me in measuring how much politics has swayed money managers is how loudly they decried the deficit after 2008.
For example: "With current government deficits and debt running amok expecting inflation rates to remain low is wishful thinking—indeed, given current trends, it is more likely that inflation will be significantly higher over the next ten to 20 years than it was from 1970 until now."
That market commentary by a Mr. Jim O’Shaughnessy was dated September 2010. Things change. No reason to be concerned now about a projected $10T deficit over the next decade (just released by the CBO). Especially in an economy finally nearing full capacity.
Want to throw another one up there for Lewis to swing at?
I'll be honest. Up until now I've always practiced what O’Shaughnessy preaches and have striven to separate politics and macroeconomics in general from investment decision making - preferring instead to focus on relative valuation of asset classes. But it's getting harder. I'm more and more inclined to believe this time is different. ... I speak as one who has loved and followed political discourse since I was 14 years old and who was subscribing to U.S. News & World Report at that age. Read the damn thing cover to cover twice every week so as not to miss a single word. Goldwater, "Tricky Dick", LBJ and the rest. But, I've never been so concerned as now. I know I'm not alone. There's some very well educated knowledgable folks on the board. Agree with Ted's overall gist that the board is becoming too political. I'll see what I can do to help turn it in a different direction.
@MSF There is an interesting question as to whether or not a belief in maximizing profit at all costs regardless of the ethical consequences is or isn't a political view. I would say it is. One could claim neutrality like Switzerland, but that has had detrimental ethical ramifications in the past: pbs.org/wgbh/pages/frontline/shows/nazis/readings/sinister.html The default stance for investors who say they don't care about politics is to maximize profit, often quantitatively, by crunching the numbers. What is often forgotten in this process--or intentionally discarded is a more accurate phrase--is that there are people behind those numbers, human beings whose labor and sometimes suffering produced those profits. If an investor buys an index fund and included in that fund is a company that routinely murders people and the investor knows this and profits from that company, is there not a political/ethical dimension to this behavior, a tacit approval of that murderous activity? Now murder is a bit extreme, although one could make some interesting arguments there with regard to the tobacco industry's knowingly withholding information on its products. But what about fraud, as in Wells Fargo's case? And in regard to party politics if one gives money to a manager or to a company that routinely seeks to purchase influence or support a specific agenda in Washington--quite common actually as O'Shaugnessy's case exemplifies--that has a direct political ramification.
@LewisBraham To a large degree, I agree with you. I do not want to be investing in companies that do bad things. Someone wrote, in another thread, that what Wells Fargo did was not out of the ordinary. (Everyone does it, so it's okay.) If this is indeed business as usual, then all businesses need to be prosecuted. I do not support ill-gotten gains.
(Withholding information can be addressed under products liability laws, e.g. defective products under the theory of failure to warn.)
But IMHO there's a difference between investing in what is legal and working toward changing those laws. I may advocate a $15 min wage, but I do not decline to do business with or invest in companies that don't meet that standard. Like Buffett, I may support politicians who would increase my taxes but I don't pay more in taxes than the current code requires me to pay.
I still feel that one can separate one's actions from one's advocacy.
Regarding hiring: Say I was opposed to virtually all government regulation (too oppressive), and I needed to contract a writer for a primer on "what is a stock". Should I refuse to consider hiring you, not because you would incorporate your views into that writing (I assume you would do an objective, professional job), but because you might spend some of your earnings supporting positions I disagreed with? That approach would make it hard to hire anyone.
If my assumption is wrong, and you're going to let your views affect your work, then clearly I should reconsider.
@msf I agree it is virtually impossible to do business or invest without entering some of these ethical/political grey areas. It is part of life and it would be hard to function on a practical level otherwise, so yes we can try and must sometimes separate these political and financial goals to function. But there is inevitably a point for many people where the political/ethical intersects with investment goals to such a degree that action for a person of conscience is necessary. It is the reason socially responsible investing exists.
What the particular ethical line is beyond which is unacceptable is of course up to each individual's taste and conscience. But for an investor to say such ethical lines don't exist for them and that they are thus "apolitical" is actually I think misguided. That person is actually endorsing a harsh libertarian ideology, an extreme political stance that believes that profit takes precedence over everything else.
Among the embedded political views in the profit above everything else investment philosophy you can deduce the following:
1. Low to no taxes--corporate and capital gains especially--as getting rid of these increases investor profits.
2. No government regulations of business except for those that protect property rights as this increases corporate profits.
3. Anti-labor. No minimum wage, no labor safety requirements, no unions as all of these reduce profits.
4. No consumer protection--as class action lawsuits and federal regs to protect consumers reduce profits.
While an investor may disagree with these ideas in their separate political silo as you say, they are implicitly endorsing them by investing in companies and with money managers that are actively seeking these goals. There is a kind of hypocrisy to this, and many people have pointed this out with regard to Warren Buffett. But we live in a world where to function one must be hypocritical sometimes. It is a matter of degrees. But the extremist politically is the libertarian investor who claims those degrees don't matter or don't exist.
Comments
https://opensecrets.org/orgs/toprecips.php?id=D000054896&type=&sort=&cycle=2012
For example: "With current government deficits and debt running amok expecting inflation rates to remain low is wishful thinking—indeed, given current trends, it is more likely that inflation will be significantly higher over the next ten to 20 years than it was from 1970 until now."
Running amok? Wasn't that a Star Trek episode?
That market commentary by a Mr. Jim O’Shaughnessy was dated September 2010. Things change. No reason to be concerned now about a projected $10T deficit over the next decade (just released by the CBO). Especially in an economy finally nearing full capacity.
Want to throw another one up there for Lewis to swing at?
I'll be honest. Up until now I've always practiced what O’Shaughnessy preaches and have striven to separate politics and macroeconomics in general from investment decision making - preferring instead to focus on relative valuation of asset classes. But it's getting harder. I'm more and more inclined to believe this time is different. ... I speak as one who has loved and followed political discourse since I was 14 years old and who was subscribing to U.S. News & World Report at that age. Read the damn thing cover to cover twice every week so as not to miss a single word. Goldwater, "Tricky Dick", LBJ and the rest. But, I've never been so concerned as now. I know I'm not alone. There's some very well educated knowledgable folks on the board. Agree with Ted's overall gist that the board is becoming too political. I'll see what I can do to help turn it in a different direction.
The default stance for investors who say they don't care about politics is to maximize profit, often quantitatively, by crunching the numbers. What is often forgotten in this process--or intentionally discarded is a more accurate phrase--is that there are people behind those numbers, human beings whose labor and sometimes suffering produced those profits. If an investor buys an index fund and included in that fund is a company that routinely murders people and the investor knows this and profits from that company, is there not a political/ethical dimension to this behavior, a tacit approval of that murderous activity? Now murder is a bit extreme, although one could make some interesting arguments there with regard to the tobacco industry's knowingly withholding information on its products. But what about fraud, as in Wells Fargo's case? And in regard to party politics if one gives money to a manager or to a company that routinely seeks to purchase influence or support a specific agenda in Washington--quite common actually as O'Shaugnessy's case exemplifies--that has a direct political ramification.
(Withholding information can be addressed under products liability laws, e.g. defective products under the theory of failure to warn.)
But IMHO there's a difference between investing in what is legal and working toward changing those laws. I may advocate a $15 min wage, but I do not decline to do business with or invest in companies that don't meet that standard. Like Buffett, I may support politicians who would increase my taxes but I don't pay more in taxes than the current code requires me to pay.
I still feel that one can separate one's actions from one's advocacy.
Regarding hiring: Say I was opposed to virtually all government regulation (too oppressive), and I needed to contract a writer for a primer on "what is a stock". Should I refuse to consider hiring you, not because you would incorporate your views into that writing (I assume you would do an objective, professional job), but because you might spend some of your earnings supporting positions I disagreed with? That approach would make it hard to hire anyone.
If my assumption is wrong, and you're going to let your views affect your work, then clearly I should reconsider.
What the particular ethical line is beyond which is unacceptable is of course up to each individual's taste and conscience. But for an investor to say such ethical lines don't exist for them and that they are thus "apolitical" is actually I think misguided. That person is actually endorsing a harsh libertarian ideology, an extreme political stance that believes that profit takes precedence over everything else.
Among the embedded political views in the profit above everything else investment philosophy you can deduce the following:
1. Low to no taxes--corporate and capital gains especially--as getting rid of these increases investor profits.
2. No government regulations of business except for those that protect property rights as this increases corporate profits.
3. Anti-labor. No minimum wage, no labor safety requirements, no unions as all of these reduce profits.
4. No consumer protection--as class action lawsuits and federal regs to protect consumers reduce profits.
While an investor may disagree with these ideas in their separate political silo as you say, they are implicitly endorsing them by investing in companies and with money managers that are actively seeking these goals. There is a kind of hypocrisy to this, and many people have pointed this out with regard to Warren Buffett. But we live in a world where to function one must be hypocritical sometimes. It is a matter of degrees. But the extremist politically is the libertarian investor who claims those degrees don't matter or don't exist.