Dear Valued Clients and Friends,
In this week’s Dividend Cafe, we are going to talk about one of the lowest-hanging fruits out there when it comes to investor mistakes. The fruit hangs low in this case because it is such a common mistake, it is such an easy one to make, and the damage that it can do can be of such a high magnitude. I cover this issue all the time in the Dividend Cafe, but the recent midterm elections served as a reminder of how important it is. I kid you not that this mistake can, for many investors, be the absolute difference between failed financial goals and successful ones. It is literal table stakes for millions of people, and yet it is one where, time and time again, driven by the flawed governor of emotion and “instinct” over the empirical reality of history, countless people insist on making the same mistake over and over again.
Well, we are not going to let that happen for those who pay attention to the Dividend Cafe, at least not to the extent we can help it. Let’s jump into the Dividend Cafe and learn to avoid the great financial mistakes, for the sake of achieving the great financial outcomes.
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You Can Set Your Watch to This
On November 9, 2012, I got a note from a client that said:
“After the results of the election a few nights ago, it is very clear to me that the market is about to be throttled in a way that will make 2008 look like a picnic. It is time to get me and ___ out and plot a different course for how we survive what is to come.”
On July 12, 2016, we had a client tell us that:
“In the event Hillary Clinton does win the Presidency I want it known that I would like my portfolio to be in all cash, immediately. I believe it will mean the destruction of our way of life and I have worked too hard for my money to watch what her Presidency would do to it.”
But on November 10, 2016, we had a different client say:
“It looks like the markets have decided that tax cuts are more important than what this idiot is going to do to the economy. Can we please discuss why I should feel safe with a Trump Presidency when it comes to our portfolio?”
On September 15, 2020, we got an email from a client that said:
“I do believe Donald Trump is going to end up winning re-election, but if he does not, based on the 70% taxes that Biden will surely impose not to mention the radical other proposals he has in mind, it will be time to get the ___ out of stocks. I imagine you agree and want to make sure we are on the same page here.”
On January 21, 2025, we got an email from a client that said:
“Watching the inauguration yesterday just reminded me what a pitiful state of affairs we face as a nation. I do not believe markets can handle four more years of this guy. Do you really not believe he is going to bring down the market and the world economy?”
In mid-September 2026, we got an email from a client that said:
“I want to take a break from the market to see how this political situation plays out … I see a period of much greater risk approaching in the political world both in the upcoming election and the Middle East conflict … Both of these could result in 2008 style market disruptions.”
None of these are paraphrased – none are fictitious – none are illustrative. These are all literal, exact communications that don’t even come close to covering the total sample of what I have received over the years. I did not keep communications like this from 2000-2009, though there were some then, too. Interestingly, that decade actually did see two significant market declines, pretty much unrelated to politics, though. A tech bubble burst at the beginning of the decade, and a credit/housing bubble burst at the end of the decade. The tendency then, though, was for an investor to be mad if they weren’t invested in a bubble. Buying Pets.com at a $10 billion valuation or flipping a condo sounds acceptable; but a President someone doesn’t like – capitalism is about to fail! The heavy polarization of the country post-GFC and intensified political hostility to the various Presidents we have had over the last 15-20 years have intensified the number of investors who were sure that “this time it’s serious!” … I suspect the trauma of the market declines that did happen in 2000 and 2008 left a mark, and I am sure there are other sociological and cultural factors at play. But there is a real movement and inclination to do something drastic in one’s portfolio around election results. It has not gone well for people.
In most of the above instances, we talked the client down from the ledge immediately; they followed the advice they pay us for, and disaster was averted. In the times that someone insists on not following our advice, we part as friends (at least from our perspective). We do not take fees from people to not follow our advice, and we rigidly follow our moral and fiduciary duty to tell the truth, to be trustworthy, and to insist on being trusted. This being a free country, though, some feel they need to rip the cord, and they have every right to do so (just not within an advisory relationship that we are stewarding).
You will soon see what all these moments have in common, besides what appears to be a highly partisan driver behind them.
Is it Just a Political Thing, Though?
Catalysts that cause otherwise rational and reasonable people to say “let me sell my entire portfolio and abandon my entire financial plan” need not be only political. I think those “election-anticipating” ones or “election-reactionary” ones are particularly common in this tribalistic moment in our culture, but they are not the extent of it. I recall the Y2K moment in the late 1990s wreaking havoc on those who reacted wrongly. I get emails all the time these days with a social media post or a podcast link or a TikTok reel or a newsletter writer who has some reason or another to “sell everything and go to cash” – and the reasons could be borderline astrological all the way to something technological, cultural, or otherwise (one person I talked to years ago told me they had an inside source that North Korea was about to nuclear attack America, and they wanted to wait until after that to buy cheap).
Fear causes us to do things. We are wired that way. It doesn’t make it right. It doesn’t make it smart. But political disruption is not the only thing investors have to be afraid of. It is much like what I see in most restaurants these days as they earnestly warn people about allergies or other gluten-this or ingredient-that … there is always something that could cause someone to take 10 minutes before ordering their food.
“So You’re Saying ____ Doesn’t Matter???”
One of the most exhausting responses to my stubborn insistence on prioritizing history, reason, experience, and prudence over reactionary and emotional portfolio decision-making goes something like this:
“Oh, so you’re saying that _____ wanting to _____ doesn’t matter?”
You can fill in the blank with whatever elected official you want and whatever potential policy enactment you want. The point is always the same: The policy or candidate problem does matter (premise), so therefore a disagreement with the conclusion (that one should abandon a properly constructed portfolio and plan) means that one disagrees with the premise. It is rather easy to identify the logical fallacy, but we are not actually talking about logic here, are we?
If one were to say, “Pets are cute, therefore we should all get rid of our television sets,” and I said, “we should not get rid of our television sets,” would you conclude that I do not think pets are cute?
(Look, I made the example up on the spot after going 18 hours without email – cut me some slack if you don’t think it works!).
The challenge is that I cannot out-logic or out-argue this mode of reasoning because it comes from a place of fear, of panic, and in some cases, anger. I do not see those things as inviting a lot of critical-thinking response.
As investors, we can, and indeed, must, recognize that certain policies, personnel, governmental directions, committee decisions, pieces of legislation, and any number of other things (up and down the continuum of magnitude) DO matter, and COULD marginally impact economic and market reality, without believing that timing an exit, without believing we know the magnitude, without believing we know the market response, and without believing we can understand all the nuances and internal dynamics that go into a wholesale call that has such dramatic impact on our portfolio and plan.
Has history not spoken time and time and time again that people:
- Get premises wrong all the time
- Get conclusions wrong all the time even when the premises are right
- Get the market response wrong all the time even when conclusions and premises prove correct
How could anyone be comfortable with those odds?
The Problem after the Problem
I have written about this so many times that I will not overburden you with it here. But the challenge for investors who “go to the sidelines” only for the bad thing not to happen (or in some cases, for dividend growth to have its biggest five-week period in history right into a midterm election) is worse than that… It is re-entry. It is re-entry when plagued by regret. It is the reality of regret, the shame of misbehavior, and the fear of being wrong twice, which almost assures you of fulfilling that prophecy by being wrong twice.
Conclusion
No one advocating for discipline, prudence, and good behavior amid election results or any other macro event or news headline denies that bad periods happen in markets. Rather, what I am advocating is that those bad events are baked in, counted on, known, anticipated, and not remotely threatening to your long-term financial success – if the plan and portfolio were properly constructed. I am asserting that a market that never has interest rate spikes, Fed surprises, bad Presidents, unfortunate war events, technological snafus, or any other catalyst for volatility and drawdown is a market that generates a lower long-term return. The volatility and reality of life’s ups and downs are the market circumstances that efficiently provide a higher return.
You just have to behave along the way.
And have a properly constructed portfolio to begin with, inseparably married to a cogent plan.
To that end, we work.
Chart of the Week
A well-constructed portfolio need not be abandoned in the face of headline realities. A shiny-object theme, though …
Quote of the Week
“A society run by grown-ups needs a thick cultural ecosystem that rewards grown-up behavior and grown-up decision-making, by which I simply mean making arguments and choices based on facts, reason, empathy, and a sense of responsibility for their actions. Such a system can tolerate a lot of eccentricity so long as the center holds. It requires leaders who care about consequences and it requires ‘followers’ to demand responsibility and accountability of leaders.”
~ Jonah Goldberg
More to Chew on
- These two really do not like each other (trust me)
- OpenAI is open about one thing – it loses a LOT of money!
It was a wild week in the market news cycle, and next Friday’s Dividend Cafe will do a rather granular and instructive analysis of CEO scandals and what they generally mean and don’t mean for companies and markets. The Nvidia story was not the only big thing that happened this week, as the Microsoft shutdown that took down about 80% of the enterprise world’s email for about 18 hours was, shall we say, suboptimal. But alas, a weekend awaits. Enjoy yours, and we shall see you in the Dividend Cafe on Monday.
With regards,
David L. Bahnsen
Managing Partner, CIO
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
