Need a Good Recipe for a Political Portfolio? Follow the Chinese

Posted on February 14, 2009

It’s no secret that Markets have been, and for the foreseeable future will be, held hostage by politicians.

How should an investor design a portfolio in a Market shaped by politicians? I believe we only need to look to the Chinese to find an answer.

An interesting study from 2005, entitled “Behavior and performance of emerging market investors: Evidence from China” (click here to read the full study) found that:

“Chinese investors are trading at a rate almost four times higher than U.S. investors.” Additionally, to the amazement of the researchers (since this data contradicts US findings) the accounts that traded more frequently actually earned higher returns.

So a clear prescription for making money on the new, Washington Wall Street: Trade Aggressively, and Invest Selectively (if ever).

This of course may prove difficult, or nearly impossible, for those not following the Markets on a daily basis, but for those who do, the intellectual justification for aggressive trading is clear.

A politician is by definition a sycophant, which implies that he/she cannot possibly make decisions based upon economic considerations. Constantly shifting “political” concerns always far outweigh any sound economic policies or basic moral values.

This means that in a politically-charged Market, as we find ourselves in today, prices of assets are even further divorced from from any economic fundamentals and become more intertwined with the fickle and ineffective policies of politicians. Hence the need to trade more frequently.

Interestingly, based on anectodal evidence, I think you can see a similar tendency among successful business operators, as distinguished from investors, in politically-corrupt, third-world economies. There is a distinct tendency to stash away gains quickly (preferably in overseas accounts) and reinvest very reluctantly in the local business. This is because these businessmen, even if they are honest, are always entirely uneasy about the potential for some sudden shift in government policy, which could spell ruin to their business and savings.

The safe strategy apparently is simply to take advantage of short-term events, cash out, and then wait for the next favorable opportunity.

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