Donald Trump has made a mistake.
Ok, maybe I have to be more specific. And if you think we’ve all heard enough about Donald Trump lately (and his mistakes), I suggest you keep reading because this time it’s a good reminder of a mistake we do not want investors to make.
Earlier this year, Trump gave his “State of the Union Address” to the American people. It was revealed later that figures he presented during this speech were half true.
Maybe that’s just politics as usual and Trump does not believe what he says. But the reality is that the economy is not reacting so fast. The results that we see in the economy at all times “A” are the results of actions and policies that were implemented some years before. Often this can also be “very many years earlier”.
Someone could argue that the same thing is wrong with the stock market – this mood, which has nothing to do with fundamentals, can push the stock market up. This is true. And part of the rise in the stock market last year or so has been linked to Trump. The expectation of laws that are friendlier to businesses and tax cuts have almost certainly led to higher prices.
But at the same time, corporate earnings in the S & P 500 rose nearly 17% for the 12 months to 30 September 2017. The expectation of a favorable government policy can help stocks. Strong double-digit earnings growth often helps more.
The point is that in his speech, Trump receives recognition for economic and business outcomes, most of which have nothing to do with him or his presidency.
If you want more proof of how ridiculous that is, think about what happened when Barack Obama took office. Obama became President of the United States in January 2009. The earnings of the S & P 500 for the 12 months to 30 September 2009 were 39% below the previous year’s level.
Is that because of Obama and his politics? Obviously not, that would be ridiculous. The decline in earnings is attributable to the impact of the real estate and financial crisis, which has its roots in years of speculation, careless investments and the indebtedness of banks and individuals.
What we can learn from Trump
We tend to make the same mistake Trump made here. Namely, that we do not judge carefully, which has led to the results we see.
Imagine a stock rises after we buy, and we assume it rises because we are brilliant. Maybe that’s right. But it can also be blind luck. Only if we look carefully, what has happened and what has led to the result, we can evaluate our actions.
The same kind of misjudgment can also occur in corporate management. When profits fall, many CEOs are looking for external sources to blame. It could be the economy, it could be the media, it could be the weather. And sometimes these are actually the drivers of the earnings decline. But we have to weigh exactly when a management team makes these statements.
If something goes wrong internally within the organization and management falsely blames external factors, it may be time to sell – not just that there are problems in the company’s operations, but also that management is either too boring or selfish, to convey that to the shareholders.
If Trump had asked for my opinion on how to fix his “problem” (do not worry, he did not!), I would suggest that when he sets up a program or policy, he clearly outlines what it aims and which economic or business metrics it should influence. In addition, he should have a team tracking these numbers so that a clear assessment of the impact of the new guidelines can be made.
I would also suggest that he associates this with some modesty. In a complex world, luck almost always plays a role.
For investors, I would suggest a very similar approach. If you make an investment, write down the “why” – the analysis – for the investment. While the investment can last over a year, two years, ten years, you can then rate the performance based on the initial analysis. However, one must also determine where the initial expectations match or differ from the actual performance.
I would suggest looking for managers who follow this approach to valuing their businesses and themselves. We want to invest with people who make sober, realistic assessments and do not praise the results they did not do to make it happen.