Systematic Relative Strength

Researchers Yosef Bonaparte, Alok Kumar, and Jeremy Page recently released their study, “Political Climate, Optimism, and Investment Decisions” which focused on investor behavior from 1991 to 2002. They found that when an investor’s favored political party held power in Washington, he or she generally increased holdings of risky stocks, shifted from foreign to domestic companies and traded less often. The opposite occurred when the preferred party was out of office. And the patterns held whether an investor was a Republican or a Democrat.

The authors did it by analyzing two sets of data: the information that UBS and the Gallup organization gather each month to calculate the UBS Index of Investor Optimism and the trading histories of more than 60,000 retail investors at a major discount brokerage firm. To preserve confidentiality, the brokerage firm’s name was not disclosed in the study, and the firm did not divulge the identities of the account holders. But the ZIP code of each investor was provided to the researchers. By analyzing presidential election voting patterns county by county, the researchers determined the likely political preferences of these account holders. The results were necessarily imprecise, but statistically significant patterns still emerged.

The details of the study can be found in this New York Times article.

“Though you might think that having money on the line provides a strong-enough incentive to keep political biases from affecting one’s investment decisions, it shouldn’t come as a surprise that it doesn’t,” said Professor Ariely, who is also the author of “Predictably Irrational.” “In politics as in other arenas of life, our beliefs exert a powerful influence on the decisions we make.” [Emphasis Added]

This is just one more excellent reason to allocate systematically based on relative strength. Political biases may quite possibly be doing damage to your investment performance.