Philip Chao, along with millions of Americans, was glued to the news channels watching the electoral map turned into a sea of red as polls closed on election night with disbelief and puzzlement. He did not give Donald Trump’s take-no-prisoner approach campaign style a reasonable chance for victory. His win reminds Philip very much of the lessons he has learned from years of investment management.
- We are blind to our blind spots and while we are in the middle of it, we can’t see the forest from the trees or the signposts along the way. In the case of this election, the mainstream media and elite observers have consistently under-estimated the degree of frustration and discontentment of mid-America and the impact of an uneven recovery since 2008 on the average citizen. The compounding frustration and dissatisfaction have not been satiated by the Obama Administration which was swept into power based on “hope” and “change”. Instead, a growing portion of the American workers felt left behind.
- When we offer our “educated” and “independent” view about the future or establishing a base case regarding an outcome, is our view truly objective? Is our analysis skewed by the destination we visualize and we unknowingly promote the factors that favor our desired conclusion? “We have never seen a back test we didn’t like” phenomenon applies not only validating an investment strategy but the same bias is evident in real life as well. In the case of the election, even many Trump supporters did not count on a Trump presidency let alone a shut out of the Democrats.
- Behavioral finance has plenty of studies that show how after the fact, people selectively recall that they anticipated the outcome and quickly identify all the “obvious” factors that were there and the outcome was not so hocking. In reality we only think that we know the reasons, factors and behaviors that statistics. Supporters of the Hillary-win view discounted every counter-signal or countervailing evidence as outliers or just noise. The reality is that a base case does not equate to certainty. By definition, there is uncertainty in every base case.
The thin margin of error among two of the most disliked candidates in this election is more than sufficient to tip the election in favor of one side or another. This is not unlike the financial markets. After eight-years of unconventional monetary policy here and globally, investors and savers have increasingly embraced risks in seeking income and return. This significantly compresses risk and term premia, yet at the same time, the variance of return (i.e. the range of negative to positive return possibilities) is not reduced. This means that there is more risk and less return in financial assets. There is simply less room to absorb normal losses in a low return world.
American economist Frank Knight in his 1921 book, Risk, Uncertainty, and Profit, differentiated risk from uncertainty. Knight suggested that risk can be defined as that within a given situation one could assign probabilities to outcomes even though there is no certainty to an outcome. There are the known-knowns. In the case of uncertainty, one could not even ascertain the range of outcomes. These are the known-unknowns and the unknowables. With no governing history, Trump is an unknown and a wild card. What he has shown during his fiery campaign as compared to his behavior and temperament after his victory begs the question who is the real Trump. One can attempt to assess his policy position (i.e. the range of outcome) from trade, immigration, the environment, alliance with our global partners, security treaties, to fiscal policy, but it is the uncertainty that we are most concerned with as a citizen and a steward of client assets. The country, its people, and the investment world will all be tested in the next four years without even knowing the risk.
At the end, no matter how much I detest Trump’s brand of election rhetoric and how Trump’s future is more like the 1980s than the 21st century, I am reassured of what America stands for.
- For an outsider who ran a low budget campaign without the support of his own party and was able to be elected to the highest office in the land speaks loudly about America. This is a land of possibilities and opportunities. We come here because there is a chance that our dreams and hopes can have a chance to be realized no matter who we are. I don’t know if this is completely true but a Trump win aids this quintessential American spirit; and
- After a most divisive and poisonous election season, the transition of power remains peaceful which speaks loudly about the strength of our democracy and our respect for the rule of law (even though I can never prove that this would be a certainty if Trump lost narrowly).
May God bless the U.S.A.