Overview
When I say the word “politics”, what thoughts or images immediately come to mind?
It seems like there is always some sort of political topic that people can discuss. Of course, because everyone has varying political beliefs, logical political conversations can quickly devolve into emotional outrages.
Discussion about politics, especially in a casual setting, is usually akin to walking on thin ice, so most people would rather talk about something else to avoid the possibility of a friendly chat turning into a heated debate.
Most people don’t want to get swept up in the day-to-day developments of politics, and investors are no different. Investors already have a fair share of things to think about and talking about the next election or some heated legislation for the sake of idle gossip isn’t a very productive use of their time.
Although most people want to stay away from political discussion as much as possible, politics cannot be ignored completely. The decisions of governments and other political leaders eventually materialize as legislation, regulations, or the formation of new public entities/government agencies.
Similarly, an investor cannot afford to turn a blind eye to politics entirely. Some government decisions may prove to be beneficial or detrimental to an investor’s plans; so, an investor needs to be aware of what political decisions may potentially affect them and to ensure they act before it’s too late.
While investing and politics share a connection, investors can rest easy knowing that they don’t need to know every political development in the countries they are invested in.
How are Politics and Investing Related?
The relationship between politics and investing may not be readily apparent, but after a bit of thinking and some observation, the connection becomes clear.
Every investor, along with the companies and/or institutions they invest in, is bound by a set of laws and regulations in the country/countries they operate in. Who sets these rules? The governments, government bodies, and other political figures who run these countries.
For example, insider trading is banned in most countries. Investor trading is considered a crime in both the U.S. and Canada. A malicious investor seeking to partake in insider trading cannot avoid this criminal classification assigned by the government.
I previously spoke about the different classes of investors, and how certain investors, depending on the category they fall under, are only allowed to purchase certain types of assets. The requirements needed to be classified as an accredited or institutional investor are set forth by securities regulators.
Not only do governments have the authority to implement new legislation, but they also have the authority to take away business permits, preferential tax treatment, construction permits, legal privileges, or one of many other things that investors or businesses need to operate smoothly.
If tomorrow the Canadian government instituted a ban on all oil and gas extraction, then this effectively marks the end of Canada’s oil and gas industry, forcing every company in the oil and gas industry to close their doors or move elsewhere.
A recent example of government influence on the industry is the cancellation of the Keystone XL pipeline by U.S. President Joe Biden. All it took was one executive order to kill a multibillion-dollar project.
Similarly, nothing is stopping the Canadian government from shutting down an industry or making it harder for an industry to continue existing. Industries can resist, but the power lies in the hands of the government when it comes to making the rules.
Investors have no choice but to play by the rules of the countries they operate in, lest they want to run the risk of being branded as a criminal. Unfortunately, sometimes the rules that investors are subject to are politically driven, leaving investors no choice but to adjust their strategies or divest from a country entirely.
When Should an Investor Worry About Politics?
For the most part, much of the political rhetoric that is announced on a daily basis has nothing to do with business and investing, hence the reason why investors do not need to know every single political development on a given day.
However, although investors don’t need to stay up to speed with daily political developments, they should be aware of the agendas of those currently in power, and the agendas of those who seek to one day form a government.
I mentioned earlier that Joe Biden cancelled the Keystone XL pipeline via executive order, one of the first executive orders he made on the first day of his presidency.
This move should have come as no surprise to investors and the oil and gas industry because the cancellation of the Keystone XL pipeline was one of Biden’s campaign promises. All he did was simply fulfill that promise.
Investors must be cognizant of the stances a government takes toward the industries they are invested in. Not only that, but an investor needs to check if that rhetoric eventually results in a tangible course of action, such as an executive order or new legislation.
If a politician running for public office makes grand promises about tax reform but never does anything, then those words are nothing more than empty promises. If new tax legislation is introduced and has a high probability of being signed into law, then risks start to become palpable.
When a political figure vying for public office takes a certain stance on an industry, every investor with money in that industry should understand that stance clearly and assess whether political promises eventually become new legislation.
Words on their own mean nothing, but words coupled with action should always be taken seriously.
Separating Noise from Legitimate Red Flags
It is no secret that politicians frequently make grandiose claims and fiery speeches about how they plan to affect major change. But for the most part, that’s all they are – just claims, not backed by any sort of action.
Unless a politician or government has explicitly laid out how they plan to implement their agenda, whether by introducing new legislation, creating a new government agency, etc, and whether those plans actually happen, then there is no cause of concern for investors.
Remember that investment risk is comprised of two elements: probability and consequence. If a government threatens to shut down an industry, there are some very serious consequences, but if the possibility of this actually happening is low then the investment risk is also low.
Before jumping to conclusions after a government announcement pertaining to a specific industry or company, take a breath, sit and down, and properly assess whether there is a valid investment risk that must be addressed or if it’s just another political speech trying to secure votes for the next election.
Wrapping Up
Although most people choose to turn a blind eye to politics, there is no denying that it influences their lives in one way or another.
Every investor must deal with the reality that politics can directly impact their investments and investment decisions. Governments and regulatory bodies set the rules, and investors must play by those rules or risk suffering major losses, or worse, ending up behind bars.
Although politics and investing are related, an investor can rest easy knowing that not every political development will affect them. There is a clear difference between grand promises for the sake of winning votes and promises that eventually lead to new laws that ultimately affect an investor’s portfolio.
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