Subscribe NowJoin over 30,000 other Vintage Value investors today!

8 Things Investors Can Learn from Trump’s Shocking Victory

Donald Trump Wind - Investing Lessons

Regardless of your political beliefs, Donald Trump’s presidential victory on Tuesday night was definitely a shocker.

But as Barry Ritholtz over at The Big Picture notes, “One of the best things to do when confronted by a major surprise is to see what there is to be learned from the experience.” After all, you can always learn a lot about how investing works from non-market events.

In the past, Ritholz says he’s found investing wisdom in March Madness, the 2012 elections, Super Bowls and $8 million janitors.

Read on below for 8 things that YOU can learn about investing from Tuesday night’s presidential election results:

1. Forecasters are Terrible

Forecasters aren’t very good at predicting the future. We have learned this about economists, market strategists and now political pollsters. We can tease out potential outcomes on a probabilistic basis, but even these expectations are frequently dashed.

As Warren Buffett says, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

2. Confirmation Bias

Everyone reads what confirms their prior beliefs. Everyone. Not just read, but specifically seek it out, retain it and ignore everything else. This is why the internet is so balkanized, and why fact-checking hardly matters. Confirmation bias is hard to shake and often impervious to reality.

Confirmation bias is the tendency to search for, interpret, or recall information in a way that confirms one’s beliefs or hypotheses. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs. People also tend to interpret ambiguous evidence as supporting their existing position.

3. Models are Not Perfect

Let’s start with the classic George E. P. Box quote: “Essentially, all models are wrong, but some are useful.” Now we can add a corollary: “Any model that figures out what is going on will soon be bypassed by events.” Everyone was so impressed with the various models like FiveThiryEight’s that they expected them to perform flawlessly.

They didn’t. This is true of models for trading, generating econometric analyses or determining who is going to win the World Cup. Everything is always changing. The best models stay right for months, or even years, but not forever. Why we seem to always be surprised is part of our flawed wetware.

Imagine that an archer is firing an arrow at a round target 30 yards away. If he hits the same spot every time after 10 shots, then he is very precise. But if that spot is 12 inches to the left of the bullseye, then he is very inaccurate. Remember that models are precisely inaccurate. They give very exact, definite answers… But that doesn’t mean they’re the right answers all the time.

4. Optimism Bias

We all suffer from the same belief that most of us are, despite the obvious mathematical odds, above average. We believe we possess special insight, that we can determine what comes next, that we have an ability to do better than everyone else. That may be true for some people at some times, but those who can are a single-digit percentage of those who believe they can. Most can’t.

This could also be called illusory superiority, and it’s related to #8’s Dunning-Kruger Effect.

5. Random Factors & Luck

We underestimate the impact of luck while confusing random chance with skill. How different might the outcome have been but for a lucky bounce or a slip? Consider what the results might have been had Republican primary candidates done solid opposition research on Trump; had FBI Director James Comey not dropped his October surprise; had 9 percent of voters ages 18 to 29 not voted for third parties, or 8 percent of voters ages 30 to 44.

Random factors are so important. That’s why people say it sometimes pays to be lucky rather than good, and why it’s flat out impossible to successfully time the market.

6. Hindsight Bias

After the fact, many of us seem to believe that we knew it all along. Of course Hillary Clinton was a terrible candidate — she lost to Barack Obama in 2008 when she should have won; she almost lost to Bernie Sanders when it was another slam dunk. But that’s how we recall it after the fact. We need to learn to say “I don’t know” about the future more often.

Hindsight bias is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.

BTW, Ritholz notes that we should say “I don’t know” more often. That’s a very interesting (and very true in my opinion) point. In Sapiens: A Brief History of Humankind, Yuval Noah Harari makes the case that scientific progress – and therefore the modern world – only started when people began saying “I don’t know.”

7. The Narrative

We create a story line — also after the fact — to try to make sense of what we didn’t expect and can’t explain. It’s a global populist uprising, or white angst, or voter rage, or a rejection of the powers that be. Or not. Pundits get this wrong all the time.

After you hear all of the convenient story lines, try to factor this into your latest narrative: Trump won with fewer votes than Mitt Romney received in 2012, and it looks as if Trump lost the popular vote.

The narrative fallacy and hindsight bias – especially as they apply to this election – remind me of Nassim Taleb’s description of black swan events. Black swan events have three properties: (1) the event is rare, (2) it has an extreme impact, and (3) it is inappropriately rationalized and categorized as predictable after the fact. Sound familiar?

8. Nobody Knows Anything

Another favorite truism from my big bag-o-quotes. We know much less than we imagine. Our perceived expertise is wildly overstated and overrated. Our optimism bias lulls us into believing we have abilities that history and experience make clear we do not possess.

This could also be called the Dunning-Kruger Effect, wherein unskilled individuals suffer from illusory superiority, mistakenly assessing their ability to be much higher than is accurate.

What were YOU’RE investing takeaways from Trump’s win? Let us know in the comments section!

Thinking, Fast and Slow

by Daniel Kahneman

Major New York Times bestseller, Winner of the National Academy of Sciences Best Book Award in 2012, Selected by the New York Times Book Review as one of the best books of 2011, A Globe and Mail Best Books of the Year 2011 Title
One of The Economist’s 2011 Books of the Year, One of The Wall Street Journal’s Best Nonfiction Books of the Year 2011, 2013 Presidential Medal of Freedom Recipient, etc.

The Black Swan: The Impact of the Highly Improbable

by Nassim Nicholas Taleb

The Black Swan is a standalone book in Nassim Nicholas Taleb’s landmark Incerto series, an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision-making in a world we don’t understand. The other books in the series are Fooled by Randomness, Antifragile, and The Bed of Procrustes.

Sapiens: A Brief History of Humankind

by Yuval Noah Harari

From a renowned historian comes a groundbreaking narrative of humanity’s creation and evolution—a #1 international bestseller—that explores the ways in which biology and history have defined us and enhanced our understanding of what it means to be “human.” New York Times Bestseller and a recommended read from President Barack Obama, Bill Gates, and Mark Zuckerberg.