I learned an important lesson in 2016

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Sometimes reading about things just isn’t enough for them to really sink in.  For me 2016 was certainly that way!  Warren Buffett and his teachings have really hit home for me through the years and I frequently try to apply his wisdom in my investment practice. But for some reason one lesson just never really resonated until this year.

In early 2016 the signs of a US recession were everywhere. I looked through the data and concluded that the only thing keeping the US out of recession was the consumer. I had seen the same thing in Canada the year before and, eventually, we did bottom out.  Everything pointed that way.  Jobs growth, industrial production, just everything. Naturally, I started looking for more signs and probably having made the decision already, fell into a classic psychological trap; confirmation bias.  This would impact how I invested and with hindsight being what it is today, we know this was a mistake!

Fast-forward a few months and you get to the eve of the Brexit referendum.  I had looked at a lot of polls and a lot of data.  Seemingly everyone agreed that this was going to be a win for the “remain” side, although not by big margins. I watched the build-up and later that night when the British voted to leave the EU.  I was stunned, and so were the markets. The financial markets don’t like uncertainty, and that is just what they suddenly had. Thankfully it was relatively short-lived and didn’t do significant damage!

This had already taught me what I needed to learn though.  As Warren Buffett had said for years, you shouldn’t make investment decisions based on the macro situation. That macro situation includes the political situation.  While I follow politics closely and try to make sure that I know what is happening, it shouldn’t have investment implications.

The final point in this lesson was the US Presidential election.  I had learned (politically) from Brexit that Trump had a much better chance than what people were giving him.  I had this feeling clinched in my mind when a news story showed a woman and her husband talking about who they were voting for. She was very sheepish and didn’t want to admit she was voting for Trump.  I learned that politically, while people aren’t wanting to admit for a candidate or position that is being ridiculed in the media, they will do just that in the voting booth when there is no social stigma.  Let me be clear; I didn’t predict that Trump would win.  I just thought he would do better than the polls and it would be incredibly close.

But a strange thing happened. Trump wasn’t supposed to win and the markets hate uncertainty.  The markets ought to have been volatile the following day, only they weren’t.  We didn’t see a massive sell-off and it wasn’t the start of the next recession.  Things were fine, and even better than fine for some sectors! 

Investing in stocks shouldn’t be based on your short-term outlook. Even when you’re right about these very complex topics, there are still other factors that you must get correct. In the case of the presidential election there are those who “knew it all along”.  I’m not one of them, although the result wasn’t as shocking as it was for some others. But even then, I wouldn’t have guessed that there would be no turmoil from the uncertainty and things would rally. Just predicting the outcome is useless; you would have to be right about the outcome, and then be right about the ramifications of that outcome. It’s far too complex to undertake!

Instead, you need a clear and planned approach to investing. You should have your criteria laid out and follow it, regardless of what you think will happen.  First, we know that these predictions don’t always come to fruition.  Second, we know that even when they do there are other factors that intervene!  I know that I learned this specifically in 2016 and hopefully my breakdown here helps impress this important lesson on you as well.