It is hard to believe that tomorrow night the United States will elect a new President, and I believe it worth discussing political risk. Political risk is the chance a business or industry one is invested in will realize a boost or drag to do external governmental action. I also separate political risk from legislative risk. A pure political risk would be, for example, the nationalization of a mining operation. The management team running the mine may be completely on point but the stock goes to zero because the government claims it for itself. Legislative risk, which we see more often in the US, would be several states legalizing medical/recreational marijuana which may impact some drug manufacturers, and increase sales of pizza and Clear Eyes.
I will say, as a holder of a BA in Political Science, this is a difficult system to successfully game. Instead of trying to reconfigure a portfolio to take advantage of industries that may benefit from guessing the election outcome correctly, folks are typically far better off either sticking to the investment plan they had worked out with an Advisor, or speaking with the advisor to see if the portfolio has exposure to a universally hated industry.
The nice thing with American Legislative/Political risk is that change usually takes a while unlike other countries which may disappear a CEO or two overnight. To sum things up, unless you have an edge stick to your plan. We will be back to examining earnings and other things that make a difference soon. 95% of the noise one hears has nothing to do with one’s portfolio. And lastly, if this election has caused elevated stress and blood pressure, here’s some nice music and pictures of cute animals: