Preliminary Reactions: Election + Markets

0:04
Welcome to today’s Polaris Podcast. I am Jeremy Witbeck, a partner of Polaris Wealth and I have with us, Jeff, Jeff. Good morning. Good morning, Jeremy.

0:14
So Jeff is the chief investment officer and our managing partner. So Jeff, looking forward to a conversation with you with regards to the election. So certainly a lot has happened within the last 24 hours. And we’d love to hear your thoughts as to how some of the preliminary results are coming. Yeah, happy November 4. I mean, if they after the election,

0:39
right now, we’re kind of I, my first reaction is kind of Wow.

0:46
Because, you know, yesterday was kind of a roller coaster all over the place.

0:52
Once again, pollsters are, are being put to shame. I’m putting them up there with weatherman and economists of being able to predict the future here. But not might actually be mean to sit there and say that about weatherman No, no, and economists. Because really, I mean, everybody was predicting our 90% chance that Joe Biden would win.

1:15
They were predicting a blowout. And here we are sitting the next morning. We’re still waiting on obviously, a lot of votes to still come in. But we have no clear decided winner.

1:28
Nevada does look like it should lean towards Biden, but they’ve got 75% of their vote in but they’ve got less than an 8000 vote difference. But for my understanding, the places that are going to be voted are are historically democratic. So

1:47
who knows? The other states that are really up in the air for Joe Biden to potentially win this election would be Wisconsin, in Michigan, right now, Wisconsin, has 99.95% of the votes, and we’re dealing with less than a 20,000, or slightly over a 20,000. Vote difference when you’re dealing with over 3 million votes. It’s a very thin margin between the two. In fact, the craziest part that I’m looking at from here is that

2:19
1.5% of the state of Michigan or Wisconsin, I should say, voted for someone other than Joe Biden and Donald Trump. So if you think about taking out like the independent party, or the Green Party or some of the other parties that were running in the state of Wisconsin, that could have been a difference also in this election, which is quite crazy to think about that Michigan’s the other state that’s leaning blue right now, with 88.4% of the district’s reporting. But again, you know, we’re looking at a 15 16,000 vote difference. Same thing where we got almost 80,000 votes that were pushed to somebody other than Joe Biden and Donald Trump. And just thinking about how much of a difference again, that could have had an influence on who will be our next president. So as we speak right now popular vote very much on Joe Biden side, with about 69 million versus 67 million for Trump. But as we speak right now, we still don’t have an answer. In order for Donald Trump to win, he has going to have to carry not only the states that look like he should possibly win, but really, either Nevada, Wisconsin or Michigan is going to have to flip from a light blue to red in order for him to be elected. But we still have, again, a number of other things going on, and I apologize for ranting but we’ve got Alaska still up there. Georgia still up in the air, North Carolina and Pennsylvania still up in the air. With Pennsylvania having 80% of their votes and but a sizable lead for Trump. I mean, a 500,000 voted for Trump, North Carolina has 100% of their votes. And I don’t know why they haven’t called this, what’s Trump having about an 80,000 vote lead within North Carolina, Georgia has 99.5% of the end with 100,000 vote differential, again, seems large enough that they should be making that call, which they still haven’t. And then Alaska only has 50% of their vote in. sounds silly. But literally, we’re going to be coming down to the fact that Nebraska, for example, gave four votes to Trump and one to Biden one vote could be the deciding factor. In this election, it is that close from an electoral college basis.

4:40
Yeah, and I find it very reflective of a lot of conversations that we’ve had with clients and other people that it’s been very divided. And these election results seem to confirm that very fact that we’re very split as to just the person who wants to leave the country over the next four years. With all that said,

5:00
It’s interesting that the markets have certainly been volatile, but are largely up this morning. Um, given that we don’t even truly know who’s won the presidency or the Senate or the House, yet, they’re still counting. Why is it that it appears? or Why do you believe rather that the markets up this morning?

5:18
Well, it’s a great question, because obviously, you know, as you were just saying, normally, when we talk to our clients, and we talk about uncertainty, normally, that uncertainty leads to volatility. And a lot of times that volatility is negative volatility, not positive volatility.

5:34
Right now, again, making fun of the pollsters, I mean, this was supposed to be a blowout easy win for Joe Biden, this was also supposed to be a blue wave, the highest probability that all of the

5:49
the the pollsters were talking about was that the democrats would hold the Senate, the house and the presidency after the selection was over. Right now, it is looking quite the opposite. And so with without having knowledge of who the President is, knowing that, for example, that the Senate will remain in republican hands is a huge factor in what’s going on with the markets right now. It means that nobody can railroad through tax increases and other things of that nature. So right now, the screen that I show shows 47 to 47, was still six, six of the running, you know, the situation’s of Senate being up in the air. But if you’re looking at really the key states and what was going on there have already been decided. And then we’ve got states like the state of Michigan, which looks like john James will remain. We’ve got Maine, North Carolina and Alaska, all very much leaning, if not almost certain, to go towards the Republican Party, which would put them at a 5149 majority here. And so that I think more than almost anything else is why the markets are rallying. The other really interesting thing out of this whole thing, just in the last 24 hours is again, this blue wave that was supposed to actually happen. The Republicans are actually taking as seats from the democrats in the house. Well, it certainly won’t be enough for them to be able to take over the house. It’s definitely the exact opposite of there was an expectation of between a talent 20 seats, transferring from Republican to Democrat. And for us to sit there and see not only did that not happen, but the Republican Party taking additional seats from from Democrats is a it’s a surprise. And so I think that, again, for looking at the markets from a historical standpoint, the worst markets ever, are when one party has complete control of the presidency and of Congress, having the senate go republican splits, Congress makes it a situation where if Joe Biden does when he won’t be able to just do whatever he wants to there will be a check and balance system in place, which is really from a historical standpoint, what the markets like to say,

8:15
Jeff will take you and it’ll be interesting to see over the next couple days how this finally shakes up, but certainly very different than what was forecasted even just a day ago. And Jeff, one of the one of the things that you’ve often said is it’s better to be partially correct, 100% wrong. And that certainly holds true with the election today. They know that there’s always some temptation for people try to speculate as to which way it’s going to take significant strides within their portfolio or other financial assets. And I think this election serves as a lesson as to why it’s important to recognize there’s only so much that we can know I’m curious to hear your thoughts as to some of the things that flair said within the portfolio, and more importantly, what we didn’t do to recognize that we don’t want to pretend like we know more than we can, and also what’s going on back to that better to be partially correct, then to completely miss the ball. What’s happening here? Yeah, absolutely. Jeremy, I think that’s a great point, because we certainly had a few people that that came to us

9:23
directly saying that they wanted out of the market. And it’s not what we were willing to do. I mean, we don’t want to sit there and guess and so

9:33
we’ve talked before about how there are certain investment management firms that have different ideologies, you know, buy and hold being one, market timing being the other. And when you’re going into cash, you’re basically saying that you’re gonna be a market timer, that you’re going to be either absolutely correct or completely wrong with the situation. The markets were turning down.

9:53
Pre election. Obviously, they were up yesterday. They were up today, and we’re up today.

10:01
You know, if you would have gone 100% of the cash, you would already be missing out on a rally here. Now, the thing that we did that, again, as you said, being partially correct, rather than completely wrong, we saw the markets pulling back, they hit off of the support level, we set decided to not put anything to work until after we were done with the election, because we weren’t sure how the markets were gonna react and how people would react to what was going on within the markets. So we shed some of our positions. But what we did purposely was we actually kept that pretty close to what was a normal occasion, we went down to about 20% cash.

10:43
But the names that we had were some of the higher risk names, which gave us a correlation in the market that really made up more like we were at a 15% discount to where we could be with a benchmark, keeping very heavily into things like technology and telecommunications, the Consumer

11:02
Services area of the stock market, and those are the areas that are rallying right now. So even though we were not fully invested the rallies over the last couple days, we got to participate in almost all of that, without taking the same sort of exposure risk with again, it’s just a little bit of insurance on the side saying, hey, if I get this wrong, we won’t hopefully be down as much as the market. We’ve got some dry powder to buy things at a lower price. But it’s not like we freaked out and go oh my gosh, you know, if so and so becomes president, then I’m going to sell everything? Well. That’s an extreme viewpoint. And I think that you’ve got to remember in a democracy is there’s just as many people that disagree with you, as do agree with you. And even though you might think that they’re absolutely crazy for their ideology, and this country, we have to respect the differences about ecology. And regardless of what happens over the next few days, few weeks as this thing tussles out, most likely going to the Supreme Court in order to find a true vector out of this entire situation. It’s part of the democracy process. And so we’ve got to sit there and accept the the good, the bad, and the ugly with it, which is sometimes not fair, but to be extreme with your portfolio and to sit there and know that you could do some some serious financial damage to yourself by taking those kind of extremes.

12:28
It just doesn’t make sense. I’m sure Jeremy, you’ve probably experienced this yourself some. I mean, when people sell out of their portfolio, do they turn around and buy back in immediately with that, once they figure it out? They’re wrong, or from your experience today? Shut? They’re digging their heels and insist they’re right, and everybody else is wrong?

12:51
Yeah, well, unfortunately, it’s the latter, where I guess two things happen. One is that they don’t want to have to admit that they’re wrong. And so they just wait and wait as the market continues to run on them. Or second, they regret what they did. And so they try to wait for the market to come back to kind of cancel out that mistake, and then it doesn’t come back. And then they just they’re kind of at a loss for what to do going forward because they completely missed the rally. And they don’t want to feel like they’re getting into a high point, which is to what you said earlier, why I will passionately try to dissuade people from going to cash because it almost always doesn’t end well. Very rarely have I seen someone actually insightfully get out of the market and be able to get back in, which probably is more attributable to luck than anything else. It just almost always goes contrary to that where people pull the cord, when they can’t take the risk anymore, which tends to be towards the bottom. And then they finally feel confident get back in after the rallies taking place, which the exact opposite of what we want to do in investment management.

13:52
And I would say and I’m sure you’ve experienced the same thing, sometimes also the, the negative impact to the relationship between us and the client. Because the client is then embarrassed by what they’ve done. They realize that what they’ve done is incorrect. And they don’t want to be reminded of it so that it ends up affecting the relationship with us, oftentimes, resulting in a termination of that relationship, because the person doesn’t want to be told that they were wrong. So you know, the extremism really has multiple tear impacts to the negative of what we’re trying to do on behalf of our clients. Yeah, unfortunately, you’re, you’re correct. And to be clear, if someone goes to cash, and then they recognize their mistake, and we’re never going to rub it in our face. I mean, we understand that money is an emotionally type thing, and that’s one of the biggest reasons why I think people should have their money managed is to get someone that can look at it clinically, But to your point, I mean, it’s really hard to to step away and say you know what, I made a big mistake. I’m going to trust you going forward.

15:00
it sometimes happens. But oftentimes it can result in just the relationship being a bit awkward going forward. And, and unfortunately does lead to, to severing the relationship at times, which is unfortunate. Um, Jeff, any last comments for what we’re seeing today or anything that you want to leave with our audience here with regard to what’s going to happen over the next few weeks, or months? Well, I think the biggest thing is, is kind of one of the last points that you made, which is, let’s be clinical with what’s happening here. One of the reasons why an investor turns to a firm like ours, is to provide the discretion to us to make the harder decisions in a clinical way that will help them for the long term. And really, when somebody decides to go to cash, or take an extreme viewpoint in what they’re trying to attempt to do, the removing that discretion from us, which defeats the entire purpose of hiring us to begin with, if you’re going to be involved with those types of things, don’t hire us or take discretion over a part of your assets and leave us to our own to manage money, the way that we see is best fit for you, and then compare to see if you’re doing any better or not. The reality behind it, as you said, perhaps you do get lucky once or twice, here or there. But the reality behind it is we as professionals should severely outperform over the long term, there may be situations where the client invests in all growth, and Okay, they’re all outperform us if they’re 100% growth, and we’re having a more diverse stance in how we’re dealing with investments, and we’ve been on a growth rally. So okay, you won for a little while. Big deal. What’s your exit strategy? When are you going to sell these things? When are you going to actually harvest? What weeds are sitting in your portfolio. So most people don’t have the time energy training, to be able to do what we do. But yet so much of it is smeared all over the media that they think that because they have information, that they have data points in which they can actually make smarter decisions, which often turns to emotional decisions, which leads to bad results.

17:17
I’ll leave you with a story. And that is back in the Great Recession. Even before the Great Recession, I was referred a client from an existing long term relationship I had.

17:31
And so we’ll just call them, Joe and Dan, to make up names. So Joe is the existing client, he refers over Dan has about 20 years old, or a retired person who turned over all their assets to us. We go through the Great Recession, and then come back out the other side. And then unfortunately, in about 2011 2012, dan passes away. Joe, is Dan’s executor, gentlemen, midst of the financial crisis in 2008, pretty much decides to sell out almost at the low of the marketplace in 2009, and then refuses to get back in as the markets rally decides that he’s gonna wait to be correct, just like you were talking about Jeremy. And He never says. So he sits there and sits there and sits there and finally gets himself invested in the markets.

18:23
And then again, like I said, his friend Dan passes away. Joe then looks at what Dan’s results are compared to his and absolutely freaks out about the difference. And I’m like, Well, that’s because you took away discretion from us. And Dan didn’t. And we were able to get all Dan’s money back by the end of 2009. And continue to make money. And so it really had a material impact with Joe, because Joe realized how much of a mistake that he made by going into cash and then refusing to sit there and admit that he was wrong in the situation. We are very good at our jobs. We do it day and night. It’s our passion. We have tools that you don’t have from a way of research, my biggest statement to you is thank you for your loyalty, please let us do our job. And that’s really where we can bring the very best to you is when left to our own devices to make decisions on your behalf, that you would not be making otherwise for yourself. So that’s my advice. Jeremy, I would say that, again, we get to deal with certain circumstances like an election day or day after where we start to see a little bit more of those extremes. But you know, we got to sit there and do what’s right and do what’s right long term for our clients. And so I think the timing of this as an excellent one. Don’t always believe what’s in the media, don’t believe the polls, invest in a clinical way. And a lot of us do our jobs and we’ll come back to you with hopefully some some great results.

19:57
Yeah, that’s that’s great. And just

20:00
to kind of summarize what you said, and emotion is almost always the enemy to investing, you have to detach that emotion from those decisions to judge thank you so much for your time really appreciate your insights and as always looking forward to the next podcast that we do together but until then everyone be happy and be healthy.

20:23
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