It is a new year, and my crystal ball was supposed to have
become magically unfogged by the turn of the calendar. Well, I
hate to disappoint you, but it hasnt. Unlike our new
president, I lack certitude about the brightness of our
My thinking is caught between two quotations from Mark
Twain. The first is, Whenever you find yourself on the
side of the majority, it is time to pause and reflect.
And the second: Ive lived through some terrible
things in my life, some of which actually happened.
On one side I am in agreement with the majority who expect
Trumps policies to benefit the economy: lower corporate
taxes, foreign corporate cash repatriation, deregulation, and
so on. This inclines me to pause and reflect, not just because
I find myself in the innately uncomfortable position of
agreeing with the majority but because these in-your-face
positives are only part of the new presidents
Trumps ascendancy also brings a lot of uncertainty
something the market is ignoring, for now. The
business-oriented pragmatism that it loves today comes with
nationalistic and protectionist job creation
rhetoric that may result in trade (or even conventional) wars.
U.S. foreign policy, trade, and military alliances that have
been in place since World War II are being questioned by the
In addition, Trump has been elected at a time when the U.S.
economy is quite levered. His growth policies will
likely bring higher interest rates, which are both positive and
negative for the consumer they help savers and punish
spenders. Higher interest rates would most likely be a net
negative for corporations, whose average debt load has doubled
since the financial crisis. And finally, higher interest rates
will be a negative for the government, whose interest expense
in 2016 was at the same level as in 2007, despite the debt load
almost doubling. Thank you, low interest rates!
This is when we start thinking of Twains second
insight and remind ourselves that we worry too much. Trump was
not elected king or dictator in a lawless banana republic. He
is the U.S. president, and when it comes to domestic policy,
his powers are limited by the Constitution, which includes
plenty of checks and balances.
The Constitution grants the president a lot more power in
his role as commander-in-chief, with fewer checks and balances.
But now we should remember that Trump has kids and grandkids
and owns a lot of shiny buildings with his name on them in this
and other countries. In other words, he has a lot of vested
interests that he really wants to keep intact during and beyond
his presidency. Think of it this way: The U.S. is a large boat,
and Trump has a very large room (a gold-plated penthouse) on
this boat. Instead of worrying about his conflicts of interest,
we should embrace them they are a guarantee that his
foreign policy, though it may be different from that of his
predecessors and may therefore create uncertainty and
volatility in the interim, will not sink this boat, since he
would go down with it. (This brings to mind another of
Twains adages: Prosperity is the best protector of
Of course there is an easy counterargument to be made: If
Trump screws up, starts a trade war, and plunges America into a
recession, his net worth may decline lets say from
$3 billion to $1 billion but he will remain a rich man
and his lifestyle will not change one iota. That is absolutely
true. In theory, youd think people who still had $1
billion would feel proportionately less pain than the average
Joe whose stock portfolio fell from $300,000 to $100,000 and
suddenly he cant retire. I cant speak for every
billionaire, but Donald Trump would be devastated, as he cares
deeply about his net worth and rank on the Forbes 400 list.
Uncertainty does lead to more volatility. We dont,
however, equate uncertainty with risk. This point is very
important. Uncertainty equates to risk under only two
circumstances: first, if your investment time horizon is not
long enough to wait out an assets reversion to its fair
value. For instance, if you have to write a check for your
daughters wedding in two days and your portfolio is down
30 percent, then volatility and risk are one and the same,
since your sale will result in a permanent loss of capital.
The second circumstance is when volatility is your master
and not the other way around. If you have done your research
and believe a stock is worth $10, and the market prices it
today at $4, you should celebrate and praise the gods of
volatility for their gracious gift. Unfortunately, you need to
have done the work to know what the company is worth, but this
research would have given you the confidence to buy when most
investors are hiding under their desks.
On this point I find myself thinking not of Mark Twain but
of another eminently
quotable sage Yoda. As he might have put it,
Embracing volatility we are.