Generally, I’m not a big politics guy.
There are a few policy priorities I’m passionate about. But, unfortunately, none of them lie distinctly on just one side of the U.S. political aisle. So there’s never really a candidate I’m super excited about.
Because of this, I don’t allocate a lot of mental energy toward worrying or even thinking about what’s going on with politicians. Yet since I know this was a big week for everyone who is passionate about all this stuff, I wanted to provide my two cents on the topic, for whatever it’s worth.
By now, it’s clear that a massive blue wave rolled across the U.S. What’s not nearly as clear is what the stock market thinks about it.
On Wednesday, there was a massive rally. The Dow was up 1,569 points, or 3.03%. The S&P 500 was up 1.58%. And the Nasdaq jumped 1.44%.
On Thursday, there was a massive drop. The Dow fell 1,833.06 points, or 3.44%. The S&P 500 plummeted 4.36%. And the Nasdaq crashed 5.52%.
That means the Nasdaq is now in official correction territory, down by more than 10% from its all-time highs.
The market is obviously trying to do some price discovery. And while nobody knows exactly what will happen from here, historical data does point toward relative underperformance during the next few years based on Tuesday’s results.
At least that’s what this 2024 chart from CNBC indicates:
Source: CNBC, Carson Group
Now, I should point out that the data doesn’t signal catastrophe, just less winning, so to speak. As shown above, the up-and-coming D.C. reality of a Republican president and Democrat Congress resulted in 4.9% gains.
That’s roughly half of the 9.9% average we saw from the S&P 500 between 1951 and 2023. But it’s still a gain nonetheless.
Let’s start with that good news – and then build on it.
Why Warren Buffett and I aren’t concerned
I know it’s been nice to see the S&P 500 gain 26.3% in 2023, 25.02% in 2024, and 17.9% last year. However, did we really think that was going to go on forever?
Eventually, every bull market calms down just like every bear market ends at some point. Long-term investors understand that reality from the get-go, which is why they’re better positioned to handle volatility.
It’s all part of doing stock market business.
In the same way, we accept that politicians come and go. And that policy decisions are made, abolished, and made again.
Our investing decisions aren’t based on macro headlines or forecasts alone regardless. They’re based on each individual company’s fundamentals: basics like their sales, earnings, and cash flows.
Intelligent investors know that if they stay disciplined, diversified, and patient, they can directly benefit from strong stocks over the long-term. There’s no better bet than that.
So this blue wave might seem great to you. Or terrifying. But history shows us that the U.S. stock market trends upward regardless of which party is in charge.
That’s the first bit of good news I can offer you today.
The second is that the greatest investor of all time, Warren Buffett, agrees with me.
He’s often said that investors shouldn’t mix their politics and investing. And since he grew his company’s value by more than 6 million percent during his 61-year tenure as CEO, it seems reasonable to listen to him on the subject.
In his 1994 letter to shareholders, Buffett declared, “We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.” And he went on to say that:
Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
Yet:
Surprise. None of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital.
Really. Stop and imagine it.
More from Warren Buffett
When Buffett took over Berkshire Hathaway (BRK-A)(BRK-B), it was worth about $22 million. By the time he wrote that 1994 letter, it was worth $11.9 billion.
And today, it’s worth $1.24 trillion. So, again, imagine how much less it would have made if he’d let politics distract them.
The very thought should make you cringe.
I’m also going to bring up Buffett’s 2016 letter. He used that space to highlight the strength of the U.S. stock market and the importance of dividends, writing:
America’s economic achievements have led to staggering profits for stockholders. During the 20th century, the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends.
Better yet, he added:
American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that.
As we should well know, he was completely right in that prediction. The Dow Jones Industrial average is up another 350% since the start of the new millennium… even despite recessions, selloffs, and periods of abject panic.
Buffett addressed all that negativity as well in his letter:
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively financed American businesses will almost certainly do well.
Again, that’s not me talking. That’s Warren Buffett.
He’s seen 16 presidents come and go in his lifetime, and 49 congressional changes. So if you’re looking for advice on pure profit potential, he’s a very knowledgeable source to consider.
“If –” you’re scared, read this
Many of my long-time readers know I didn’t study finance or economics in school. Rather, long ago, I was an English major at the University of Virginia.
So I particularly like how Buffett once referred investors to Rudyard Kipling’s poem “If –”, which goes like this:
Published in 1910, “If –” hasn’t lost its relevance even a century and a quarter later. Like Buffett, I see it as a rallying cry whenever we’re surprised, flustered, stressed, scared, or worse by political headlines and stock market slumps.
Embracing it will help us keep a level head, maintain sound decision-making, and resist the urge to overreact to scary circumstances.
Otherwise, as indicated above, our fear can have devastating effects on our wealth.
Best wishes,
Nick Ward
Analyst, Wide Moat Research
