Can a candidate buy an election? Or can a Super PAC make the purchase for him? All of the media attention on election spending had me wondering if this is a nomination process or simply an auction. But does spending by candidates and PACs actually predict success? And what does this have to do with investing? Here’s what I’ve learned.
Can money buy elections?
Imagine five to ten million dollar contributions by individuals right before a primary contest! Isn’t that an unfair, even immoral, advantage? “A big fat no,” according to Stephen Dubner and Steven Levitt of Freakanomics. I would click on the link to hear their reasoning directly. In a nutshell, they argue that yes, the candidate with the most financial support often wins, but the money itself doesn’t generate many votes.
Instead, their research shows it is more the other way around – candidates who have successes attract donations because contributors want to back a candidate who can win. That is, voter support triggers contributions; but contributions and the ad spending that follow do not produce much additional voter support.
This is a great example that differentiates correlation and causation. Just because you see lots of umbrellas on rainy days does not mean the umbrellas cause the rain. While commentators may rant about the unfair influence of big contributions, the Freakanomists say all that money is not buying much additional support at the polls.
Correlation, not cause
Just as candidates running behind in the polls may blame their failures on fat cat donations to opponent Super PACs, we often see the same foggy reasoning in investing. Market pundits and analysts make a living by trying to convince us that Situation A caused stock prices to go up, or that Situation B caused interest rates to fall. These things may sometimes happen together, (like a rising stock market when GDP grows, or when the NFC wins the Super Bowl) but it doesn’t mean that one caused the other.
I hear and see the “Blame the umbrellas!” effect almost every day, certainly in the media, but most often in the Wall Street and research community. While their arguments may sound sensible (Sell Treasuries!, the Fed is leaving!), the consequences can be awful. Ask Bill Gross.
As Warren Buffett has often said, “just because you know what the economy is doing doesn’t tell you what stock prices are.” November 2007 was a very rosy economic time, with earnings, stock prices, and the economy all hitting record highs. We know what happened next. Similarly, in February 2009 the opposite was true. The former was a time to sell stocks, and the latter a time to buy, although I can count on one hand the number of people I know who actually did that. Everyone else saw causal relationships that weren’t there and paid a big price.
Plan, instead of guessing, is our advice at Osbon Capital. Pay attention to facts (current prices and yields) and things you can control (expenses, diversification), and stay focused on your personal investment goals. In that way, you can ignore a lot of useless information and enjoy a portfolio that is built for you.
For our most popular posts, click here.
This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.
Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.