The 3 Ps: politics, profits, and probabilities

Fundamentals, not headlines, ultimately drive financial markets. Although it is always tempting to listen to the news, successful investing depends (perhaps more than ever) on a dispassionate review of fundamentals. We’ve attempted to sift through the current noise to highlight what we think is important and not, and summarized them as “The Three Ps” of politics, profits, and probabilities.

Politics: ignore it

Politics is about what should be. Investing is about what is. At RBA, we invest based on what “is.” Our sole goal is to invest successfully for our clients, and not to advocate a particular political position.

One might have liked President Obama or not, but there was a major bull market during his two terms. One may like President Trump or not, but the bull market is continuing. If one structured portfolios based on one’s views of what should be, one has missed all or part of the 8+ year bull market. Period. End of story.

We pointed out last month that the recent performance of the South Korean stock market is glaring evidence of how listening to politicians can obscure potentially exciting investment opportunities. Although politicians have focused on the geopolitical risks associated with North Korea, the stock markets have focused on the fundamentals of South Korea. The South Korean stock market is up more than 25% year-to-date (in USD terms) and roughly tripled the return of the US stock market!

There may indeed be geopolitical risks associated with North Korea, but investors need to remember that fundamentals and not politicians’ desires to alter geopolitics ultimately drive stock markets.

 

Profits: crucially important

Perhaps the primary distinction between RBA’s investment process and those of other firms is that RBA focuses on profit cycles and not economic cycles. That is a subtle, but extraordinarily important, difference because history shows the financial markets watch profit cycles whereas most investors follow economic cycles…

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Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments [and the portfolio manager] believe to be reasonable assumptions, Purpose Investments [and the portfolio manager] cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

 

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