My next investment is going to be a sign for the front door that reads: "Asking what the markets will do now that Donald Trump is president will get you a kick in the rear."
I have focused on keeping my head down and ignoring all the noise surrounding Trump and the markets this week, but even the youngest wants to talk about the president-elect and the stock market. When a 13-year-old girl devoted to all things "Dr. Who" and Twenty One Pilots is talking about the stock exchange it's time to move on from the discussion.
There is no one outside the Trump inner circle who has a clue exactly what he will do when he takes office, much less how the markets will react to his policy proposals.
To demonstrate the folly of using elections or politics to pick stocks let's look at who the biggest winners have been this past week.
Investors who bought super-regional banks have had a great year in the last week. When I was looking through the 13F filings, I noticed that some of the investors I follow, including Basswood Capital, Jacobs Asset Management and Michael Price, were buyers of Regions Financial (RF) . The stock is up almost 25% since Election Day as money flooded into the regional banks.
I do not think any of these investors were buying these shares because they thought Donald Trump would win the election. At that time no one on Wall Street thought Trump was a lock for the White House, and I doubt any one of the seasoned bank and value investors would be willing to make such a wager. They were buyers because the stock traded below tangible book value in the third quarter and they considered the shares a bargain.
Zions Bancorporation (ZION) is another bank that had a huge week, rising almost 20% since the election. Basswood, along with Castine Capital and Stieven Capital, were big buyers of ZION over the summer. Once again, I suspect that the stock traded below tangible book value and looked like a bargain played a much bigger role in the buy decisions of these experienced investors than the prospects of a Trump Presidency.
The reason to purchase a stock is that it is cheap and analysis projects that the company can survive until it thrives again in the future. If you are a growth stock investor and think a company can grow revenues and earnings for an extended period of time and lift its shares higher over time that's a valid reason for buying, albeit not one I find attractive. Anything else is pure speculation, and if market history tells us anything it is that individual investors are poor speculators.
I buy stocks when they are cheap and that's a bit of a problem right now. James Montier of GMO, one of the best value managers and strategists on the planet, told a gathering of clients in London earlier this week "Part of the problem from our perspective, when you look at the world's assets, is nothing's cheap. It's not a great starting point if you're an investment manager."
According to an article in the Financial Times, Montier also cautioned "They get excited, they love narratives, I get it, it's fun and the world would be a very dull place if we didn't have stories, it's the way people think. Unfortunately, it's not a great way to think about investing."
The article went on to report that about 40% of the firm's $100 billion in assets under management was in cash as valuation trumped politics in its investment decision-making process.
That's about the same percentage in cash I have been carrying all year on average, and I think it is precisely the right thing to do now. The market is not cheap, growth is sluggish and the election didn't change these facts.
If you owned a bunch of regional banks, infrastructure stocks and other groups that the market has selected as winners under Donald Trump, congratulations and well done. If you did not already own them, please try to resist the urge to jump on the train now.
Looking at the two banks that the bargain hunters were buying below book value over the summer, Regions now trades at 1.4x book value and Zions is at almost 1.3x tangible book. They are not cheap anymore.
Buy value, not stories.
