With the U.S. election now just 24 hours away, I’ve been recalling what it was like to sit in a car with each of my three teenage children when they were learning how to drive.
Quite early on you tackle the principles of steering safely. My advice was an exhortation to “Aim high!” whenever I sensed that eyes were drifting down toward the dashboard or out toward the sidewalk.
It’s counterintuitive advice—but that’s why it’s so useful. Your attention is inevitably drawn to the potential obstacles and dangers closest to you, in the foreground of your vision. But let it stay there and you end up swerving rather than steering, careering toward one obstacle as you try to avoid another. “Aim high,” keeping your eyes on the middle of the road well ahead of you, and you drive smoothly on your way.
On the Nature of Uncertainty
This is a paradox we’ve tackled in a few of our recent CIO Perspectives. Investors have a lot of politics clouding their peripheral vision right now. It’s not as though politics are irrelevant to investment portfolios, any more than sidewalks and parked cars are irrelevant to the learning driver. But the safest way to address them is to acknowledge that they are there while looking past them, focusing on the long-term center ground to which they are likely to converge rather than the short-term extremes where they now sit.
This is the nature of events loaded with uncertainty. In the lead-up to such events and in the immediate aftermath, the uncertainty is high; as time passes, some of that uncertainty diminishes.
For example, it’s now 20 weeks since the Brexit referendum. Before the vote, uncertainty was high, and in the immediate aftermath, the U.K. government’s position that “Brexit means Brexit” kept us guessing. But by last week we had an important High Court judgment that, while adding uncertainty to the timing of the U.K.’s exit from the European Union, reduced the uncertainty around the type of exit it might be—more “soft” than “hard.”
Tomorrow’s Election Results Are Only the Start
Faced with events of extreme uncertainty that diminish over time, the investors who drive most smoothly are usually the ones who recognize that their greatest advantage is their long-term time horizon.
I suspect this will be one of the main messages to come out of a webinar that Joe Amato, Tony Tutrone and I will hold on Wednesday to discuss our initial thoughts on tomorrow’s U.S. election results.
By then, we should have more information than we do now, but it’s not a certainty. The shape of Congress will be clearer. But the presidential election polls are close and one candidate has been calling the integrity of the process into question; recall that it took a month to confirm who won in 2000.
As I suggested back in February, when Brexit and candidate Trump still seemed like low-probability outcomes, exploiting your long-term time horizon in an environment like today’s involves hedging specific risks where possible, reducing whole-portfolio risk, and taking contrarian positions when market pricing moves too far. Those able to adopt options strategies can almost literally sell short-term uncertainty in exchange for long-term certainty via put writing. I believe that’s a compelling opportunity at the moment.
In other words, “aim high.” The time to hold fast to rational argument, a calm outlook and high principles is precisely when others are swayed by innuendo, hyperbole and low rhetoric. While they swerve from one outrageous revelation to the next, we can look further down the road to the time when the checks and balances of the political and the economic systems have restored some equilibrium. If you ever learned to drive, you know it’s the right thing to do.
Neuberger Berman’s CIO insight by Erik L. Knutzen