When I started my investment advisory business, the world was a quaint place. Investments could be chosen on their merit, sector trends, free-cash-flow-based valuations, etc. Sure, one had to keep in mind the ebb and flow of interest rates and currency fluctuations, but these, whether cyclical or secular, were moderate. Now, I'm no greybeard, I started my business in 2003.
The government has become such a large part of the US economy (Omega Advisors estimate that gov't spending will equal 43% of GDP in 2009) that picking investment winners or losers in many industries relies on discerning government spending plans. Stock-specific research has devolved to such game theory as:
- Which area will be stimuated next? See Pimco's "shake hands with the government" investment thesis.
- Since money printing will continue for too long, which non-printable commodity should we buy as a hedge?
- Which winner will the government back next, like they backed the debt holders of Citi, American Express, and GE? Certainly bets have been made predicting which financial is 'just big enough not to fail'. Big bets were made on CIT.
- Regardless of party affiliation, we can all agree that the US Government is spending beyond its means. Which sacred cow shall be slain? Health Care is the odds-on favorite, but what about Defense, or Farm Subsidies?
I think the outperformance of the NASDAQ in 2009, and the rally in tech stocks in particular, emanates from their relative independence from government control.
My clients don't care for investment purism. They care about results. So, we continue to look for ways to conservatively invest without relying on a prediction on where the government aims its largesse.